Zuora, Inc.
Q2 2021 Earnings Call Transcript

Published: 2 Sep 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Zuora's Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Joon Huh, Vice President of Investor Relations. Please, go ahead.

[Joon Huh:]

Thank you. Good afternoon and welcome to Zuora's second quarter fiscal 2021 earnings conference call. Joining me today are Tien Tzuo, Zuora's Chief Executive Officer; and Todd McElhatton, Zuora's Chief Financial Officer. The purpose of today's call is for us to provide some color on our second quarter results, as well as provide our financial outlook for the upcoming quarter.

[Tien Tzuo:]

Thanks, Joon, and thank you, everyone, for joining us today on Zuora's second quarter earnings call for fiscal 2021. Let me start the call by saying that we hope you are staying safe and healthy. The current pandemic is creating a challenging environment for lots of people, trying to manage jobs and families from home. Here in California, we are also very grateful to all the first responders on the frontlines of the fires in the Bay Area. As a company, Zuora remains committed to supporting our customers, partners, employees and other stakeholders through these times. So against this as backdrop, I am pleased with our second quarter results. We performed well compared to our expectations from a quarter ago. We came in at the high end of our revenue guidance and well ahead on profitability. We effectively managed our cash spend, driven partially by strong collections activity. We helped 41 of our customers go live in the quarter, indicating that our customers have continued to adopt our platform during the COVID crisis. We added new customers in our core markets of high tech, media and manufacturing, while also seeing interest from industries such as education and the public sector as the subscription economy continues to expand. And we strengthened our leadership team with the addition of Todd McElhatton, as our CFO. I'm personally incredibly excited to have him on board and joining me on this call. Going beyond the immediate results, when I look at Q2, I would offer up four observations. First, it's clear that the subscription business model is thriving during this time of COVID. Companies are increasingly waking up to the power of this model. Second, the power of our technology has never been more apparent in giving companies the agility, insights and automation that they need to adapt and grow in this new environment.

[Todd McElhatton:]

Thanks, Tien, and thank you, everyone, for joining the call. I look forward to the day where I can meet everyone in person. I'm excited to be part of the Zuora team to drive our vision for the subscription economy. I'm here because I can see a huge opportunity in front of us and that we have work to do to capitalize on that. So let me go over some initial thoughts and actions that we're taking to improve performance.

[Operator:]

Thank you. Your first question will come from the line of Joseph Vafi of Canaccord. Please, go ahead.

[Joseph Vafi:]

Hey, guys. Good afternoon and, Todd, welcome, I think, to your first earnings call here. Just wanted to kind of circle back on the churn in the quarter. I think, it sounded like you said maybe this is the trough on churn. I was wondering if you could, kind of, give us some highlights if churn was kind of more focused in kind of some of the more affected verticals from the pandemic, and maybe if there's any kind of update you could give us here for the month of August on churn. And then maybe I have a quick follow-up.

[Todd McElhatton:]

All right. Well, thanks Joe.

[Tien Tzuo:]

Go ahead, Todd.

[Todd McElhatton:]

Okay. So, look, I think on churn, we absolutely do think this was going to be the toughest quarter for us. When we take a look at what we had. So 2 points of the churn that we had came from bankruptcies, M&A activity and product fit. And then we had another about 1 point -- sorry about that. We had another about 1 point of churn that came from downsells. And we've really been working with customers to make sure we do the right thing and keep them in the long run as a customer. So when you put those two things, those were the main drivers that we saw. We're definitely expecting churn to go back to our historical levels. But as we mentioned in the script, the net dollar retention is kind of a lagging metric, so I don't expect to see significant change in that in the near term.

[Tien Tzuo:]

Yes. So, Joe, I would say -- yes, I would just add that your intuition is right, so that's what I will say.

[Joseph Vafi:]

Okay. Fair enough. And then just kind of would be interested in the analytics stuff that you mentioned relative to -- if you kind of looked around at your customer base, some of them are more sophisticated than others. How sophisticated are customers in being able to calculate some of their metrics on their subscription products at this point, relative to their internal tools versus what you're starting to sell right now?

[Tien Tzuo:]

Yes. I would say when you look at the analytics, there's the data and then there's the tool, right? And we have an excellent set of analytics tools, but we also know that customers sometimes need to have their own tools, whether it's quick or anything else and to be able to integrate. But access to the data is really important. We're the system of record for so much of their information, right, subscribers, churns, bill invoices, payments and so on and so forth. And more than that, we have over a decade's worth of history now, where it's not just the data itself, but the interpretation of the data. And so we're starting to tell customers that says, look, when we go ahead and segment our customers in the high growers, medium growers, slower growers. What are the key steps? So, for example, companies that do some level of usage-based billing actually grow faster. So customers that -- companies that have a higher degree of customer engagement, where they're coming back every year, making modifications to their subscriptions and contracts, they tend to grow faster. And so I would say, our goal isn't just to be a tool. We really not just want to have the access to the data that gives them the ability to understand what to do, but we also want to go a step further and actually translate that data into actionable insights for them.

[Joseph Vafi:]

Okay, fair enough. And may I just sneak one quick one in on the payment side? I saw the relationship with GoCardless a couple of weeks ago. Just, kind of, from a payments angle, how you're looking at the opportunity there, Tien, and how that could evolve over time into maybe potentially theoretically a new revenue stream for you? Thanks a lot.

[Tien Tzuo:]

Yes. I would say that the starting point is really our customers. Our mission is to make customers successful. And that is why we support, I think, over 35 different payment gateways around the world. We want our companies to be able to choose and support any type of payment method that their customers want to use to settle their invoices. But more than that, we're starting to get much deeper into how to help them maximize collections, whether it's percent of electronic payment success or the fees that they pay on each one of these transactions. GoCardless is one of our great partners that has a specialty and I'd say, non-credit card type of electronic payment methods, right, things like ACH, things like Direct Debit. And there's just huge benefit to be had to move some percentage of your credit card customers over to an ACH, Direct Debit environment, both for cost per transaction and recognizing that these numbers don't change as much, right? And so the payment success rates tend to be higher. And so we've partnered with them really to have better joint success with our joint customers. You talked about the financial relationship. The financial relationship with them is pretty typical. There's some sort of standard revenue share involved, but our primary focus is delivering customer success to our joint customers.

[Joseph Vafi:]

Great. Thanks very much guys.

[Operator:]

Your next question will come from the line of Scott Berg of Needham. Please go ahead.

[Tien Tzuo:]

Scott?

[Scott Berg:]

Sorry, I was on mute. Hi, everyone. Thanks for taking my questions. I guess, we got a couple here. Tien, let's talk about the refocus around sales in those three core verticals. How should we think about the impact on maybe your TAM going forward? What that does maybe in the -- to intermediate term, how you think about maybe growth over the next three to five years as we come out of the low point of the economic cycle with the retail sales force? And then maybe the follow-up to that would be the impact of the operating model, and maybe around sales and marketing as you become more focused in those three areas.

[Tien Tzuo:]

Those are great, great questions. So these three areas are the same three areas we've been talking about for some time, right. It's the high-tech sector, it's the media sector, and it's the manufacturing sector. And Scott, we have data, right. And we're trying to make these decisions based on data. And so we can see, and you see this in our SEI studies, which of the industries are actually faster growing. And so we're trying to say, hey, if our aspiration is to be an index of the Subscription Economy, and we have data to help us choose, which are the best companies, and which are the best industries to focus on, and we have the insights and the consulting to help companies become the best companies in their space, that ultimately is going to give us a portfolio that is highly valuable. And so you're seeing us really doing that. So you're absolutely right. We think that there will be natural improvements to the operating model with the ability to focus on a set of companies and with the ability to pick and choose, if you will, the winners from the losers and making sure that we work with them. Now that's not to say we're going to ignore the other sectors, right? We mentioned offhand that we're seeing expansion in the Subscription Economy into spaces like education, into spaces like public sector. And so we're always going to have a foot in some of these other areas. But we want to make sure that we're doing the right thing. We're being the most efficient in our sales and marketing and staying focused and really being the pick, the industries and the companies that are growing the fastest is, I think, a key part of our strategy.

[Todd McElhatton:]

So maybe I'd just give maybe a little more color, Scott. On the go-to-market, on the changes, I think we feel like we're really making good progress. And so when I look the things I would want to see is how is pipeline developing, we've seen double-digit increase quarter-over-quarter. I would take a look at sales velocity, that's improving. How is our sales rep productivity? That's also improving. And we're also getting that pipeline in those areas where we know we can be successful and grow and retain customers. So look, we're just two quarters into it. We're seeing the right leading indicators of where we want to go. And I also expect as we're able to do this, this will help us gain more operating leverage out of our model.

[Scott Berg:]

Great. Helpful. And then I just wanted to touch on pricing, some of the changes you're making there, trying to right-size some of these contracts moving forward. Tien, I believe this is something we probably spoke about in the past. It's always kind of been a little bit of a challenge, trying to find the balance between what customers think they need and what they really need. How do we think about that process going forward to kind of ensure, I guess, that some of these initial deals don't get out too far ahead of themselves?

[Tien Tzuo:]

Yes. I think the lesson that, given what we do, we work a lot with our customers on pricing strategies. And we do that ourselves. We do that through our partners with companies like Simon-Kucher, companies like Profitwell. And the lesson, if you wanted to bring it down to a single thing is customers want to pay for value. Customers don't want to be on the on the clock, all right, so a pure metered model that might not make any sense.But customers want to pay for value and the best way to do that is to tie your pricing model to the value that they're experiencing. And that's something that we certainly believe in. It is a balancing act, right, that customers also want predictability. But you're seeing us really say, 'Well, how do we do a lot more of that?' And you're seeing some companies in our customer base, and there's been some high-profile pricing model changes really follow the same. This is the future, right? This is what AWS is teaching us. This is what Netflix is teaching us. But more and more, the world is moving towards consumption-based business models, which of course, benefits us because that creates an incredibly strong need for a sophisticated billing system.

[Scott Berg:]

Great. Thanks for taking my questions.

[Operator:]

Your next question will come from the line of Stan Zlotsky of Morgan Stanley. Please go ahead.

[Stan Zlotsky:]

Perfect. Thank you so much guys. And my apologies if some of my questions have already been asked and answered, just jumping between calls here. Just on the churn, when churn, when -- if somebody churns off, I mean, the M&A and the bankruptcy makes a ton of sense, but on product fit, where do customers go? What do they do when they -- if they do turn off Zuora and especially considering the environment where we are now? And then I have a quick follow-up.

[Tien Tzuo:]

Yes. I think if you look at what we do, our sweet spot is really companies that have some level of volume and some level of complexity into their business. And we do believe that as businesses grow, they're ultimately going to go in that area, right? They're going to have more volume, because they're going to do more usage-based billing models. They're going to pursue a wider market, maybe go down market and whatnot. Well, there are some companies that are saying, look, our growth is not what we expected to be. We only have a few hundred customers. Does it make sense for us simply to do this stuff by hand? And given their business situation, they might choose to adopt a path like that. And so that's why, again, with all the data that we have, we can predict some of these things. We can predict which companies and which industries are going to be the fast growers are -- have a chance to be the next Zoom, where though the idea of doing it by hand or doing it manually just wouldn't make any sense. And so historically, we might have signed up a few customers at aspirations, but just for whatever reason, it didn't work out for them. Those are the ones that you're going to see really move towards a more manual-based model.

[Stan Zlotsky:]

Got it. That makes sense. And as far as just sales productivity, you guys mentioned you've seen improvements in sales productivity. How are you thinking about the actual sales hiring for the remainder of this year? And, potentially, anything that you're thinking about as far as maybe changes or tweaks to your sales organization as you head into fiscal 2022.

[Tien Tzuo:]

So look, I'll take that. I think we pretty much have the model where we want it to be. We're taking a look at from a standpoint of what the capacity of that current team is and where we want to get to from a growth perspective. So I will say we do have head count that we will be hiring during the second half of this year. And I would certainly expect that we would have growth next year in the quota-crying headcount.

[Stan Zlotsky:]

Okay. Perfect. Thank you so much.

[Operator:]

Your next question will come from the line of Brent Thill with Jefferies. Please go ahead.

[Luv Sodha:]

Hey, guys. This is Luv Sodha on for Brent Thill. Thank you for taking my questions. And welcome to Todd. I had a couple of questions. One was, I wanted to dig into the pipeline improvement that you guys cited. In terms of this pipeline improvement, could you give us some color around sort of where the pipeline is improving? Is it small deals? Is it large deals? Or is it like add-on sales from the initial sale? That would be helpful. And then, I have a follow-up as well.

[Tien Tzuo:]

Yes. I would say, the simple answer to the pipeline is, interest level in the subscription business has never been higher. And when you hear these stories, when you hear these stories of Zoom, when you hear these stories of the SaaS companies thriving, when you hear these stories of these media companies thriving and you're hearing the companies that have a direct relationship with their customers and you forget sometimes that most companies do not have a direct relationship with customers, right? CPG companies don't, auto manufacturers traditionally don't, right? You sell through distributors, you sell through retailers, you sell through wholesalers, you sell through dealers, and those companies have not been able to adapt as quickly in the last six months. And so companies are saying, look, we need to have a direct relationship with our customers. And we need to pivot our business model so that it's based on our direct relationships with our customers, and that is what we call a subscription-based business model. And so, it's not a surprise that RFPs are up year-over-year, demand is up over year-over-year. We're trying to make sure, though, that we're focused on generating this pipe into three core verticals that we know are where the growth is going to be in the short term, even as we pursue, right, the leaders in other industries that want to basically be the first movers in their industries into the subscription economy.

[Todd McElhatton:]

I guess the other thing I would maybe add, Luv, is in addition to what Tien said, we're growing in the areas that we want to grow. The quality is better from a standpoint of seeing how pipeline is progressing through the system. So we're really pleased with that. And again, the customers that we are seeing are in that core mid-size to large companies that are the backbone of our revenue.

[Luv Sodha:]

Perfect. And maybe one more on -- just a follow-up on the Zuora Billings and Zuora Revenue integration. I'm guessing that that is behind you is -- so could we expect the cross-sell to resume? And will that have an uplift on the retention rates that you're seeing out there? Thank you.

[Todd McElhatton:]

Yes, yes. So we're -- the integration is absolutely behind us. It's now been in the marketplace, gosh, now for what six months, and the product continues to be evolved. The product continues to get better and better, but we're really happy. It's helping our customers shrink time to close the books. It's helping them really reduce all the manual effort required to do revenue recognition, and we feel really good. And the cross-sell motion is absolutely -- is happening, not just the cross-sell motion, but -- well, the cross-sell motion on both sides, right, selling, billing to revenue customers and vice versa, but also pursuing new customers with an integrated joint solution for a full order to revenue solution. And those things are all happening right now.

[Luv Sodha:]

Perfect. Thank you, Tien. I’ll pass it on.

[Operator:]

And we have no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

[Joon Huh:]

Great. Thank you so much for joining the call with us today. And we look forward to catching up with you throughout the quarter, and we'll talk to you next time. Thank you.

[Operator:]

And this concludes today's conference call. You may now disconnect.