Zuora, Inc.
Q1 2020 Earnings Call Transcript

Published: 30 May 2019

[Operator:]

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zuora First Quarter and Fiscal 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn your call over to Joon Huh, VP of Investor Relations. You may begin your conference.

[Joon Huh:]

Thanks, Chris. Good afternoon and welcome to Zuora's first quarter fiscal 2020 earnings conference call. Joining me today are Tien Tzuo, Zuora's Chief Executive Officer; and Tyler Sloat, Zuora's Chief Financial 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 and fiscal year 2020. 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, and the most recent 10-K filed with the SEC.

[Tien Tzuo:]

Thanks, Joon. And welcome to our first quarter earnings call for fiscal 2020. Our first quarter results were largely in line with our expectations, subscription revenues grew 32% and professional services increased 1% resulting in total revenue of $64.1 million for the quarter. Now as you all know, we're playing in a large secular shift towards a subscription economy, a shift that's still in the early innings and a shift that underpins our ability to achieve long-term sustainable growth. And so, we're incredibly bullish about the future. However, while we had solid Q1 financial results, we did have some challenges which are impacting our Q2 and our full year outlook. So, let me address this upfront. I will structure my comments today with the following. I'll start by talking through the two execution headwinds that we saw in the quarter. I'll cover the specific actions we are taking. Later I'll share some of the signs we're seeing that continue to support the thesis of the long-term growth of the subscription economy. And I'll close with my thoughts on our products and where we are headed. First, based on what I saw in Q1, we need to improve our sales execution. As you know from our recent calls, Global 2000 companies have been an important source of our recent growth. Companies like Caterpillar, Ford and Schneider Electric. And so, we've been expanding our strategic sales teams and have hired a number of talented sales people over the past year. Or seen in Q1 is that the newer reps were less than half as productive than our more experienced reps. We're finding that we need to improve the support of our new reps with training and experienced oversight to help them ramp and close new businesses.

[Tyler Sloat:]

Thanks Tien. Let me start today by reviewing our key operating metrics before moving to our financial results. I will then close with our outlook for the second quarter and the remainder of the year. Starting with our key operating metrics. We ended the quarter with 546 customers over 100k thousand pay-TV representing 24% growth versus the prior year. We saw solid growth in this number, but the field execution hurdles that Tien mentioned earlier clearly impacted our rate in signing up new customers. This group of customers continues to represent the vast majority of our business, represent over 85% of our ARR.

[Operator:]

Your first question comes from Stan Zlotsky with Morgan Stanley. Your line is open.

[Stan Zlotsky:]

All right. Thank you so much for taking my question. So, maybe just digging into the sales changes that you guys are making now. Is it something specific that happened in Q1 that that made you kind of sit up and realize, “Hey, you know, we need to make changes now,” or is this something that's been brewing and you decide to, if you find okay. And you let's rip off the band, let's make these changes now before things potentially getting worse?

[Tien Tzuo:]

Yes. If I were to simplify down, right, we're an enterprise software company. Our deal sizes, we sell to the upper end of the market. And I would say there is a certain amount of thinking that we could power our way through our quarters through sheer brute force. And so, I think Stan, what we just saw is, is that eventually catches up to you. And for us we have a incredible opportunity here with a subscription economy to build a billion dollar or a multi-billion dollar company and you don't just do that through brute force. And so, we've got to move towards a more predictable sales model and we have started hiring a lot of folks that have seen the next level of scale. We talked about the new folks that we've hired into the operations team, the enablement team, the management team. But what we saw in Q1 was a strong desire in me and the executive team here to accelerate that change.

[Stan Zlotsky:]

Got it. That makes sense. And I think that the one metric that really stands out to a lot, people is really the transaction volume, right? The 34% growth that you saw in the quarter and 42% in the trailing 12-month basis. Is that what investors as you're going through a transition, this is what investors should really kind of hang their head on, it's like, “Hey, this is the opportunity, right.” This is the big, the growth in the underlying subscriptions that's continuing to increase and thereby, this is the opportunity that these guys are executing to.

[Tyler Sloat:]

Yes. I'll take that. This is Tyler. That's absolutely right. We talk about that number and that's why we spend a little bit time on the call to actually explain how that correlates to revenue. But the reason we picked that as a key metric coming in is that, it's indicative that as companies continue to use our system, as that number keeps going, we're going to be able to grow with them. But we also -- we have incredibly sticky solution and we are a mission-critical system of record for them. And so, we watch that carefully for each customer and we do view that as a very positive thing.

[Stan Zlotsky:]

Got it. Okay. Thank you so much.

[Operator:]

Your next question is from John DiFucci with Jefferies. Your line is open.

[John DiFucci:]

Thank you. I have a question for Tien and one for Tyler. So, Tien, I sort of get the integration of Billings and RevPro and how that could sort of slow some things down. But, I know I'm going to eat this question tomorrow. I mean you bought Leeyo two years ago. So, like how could it not be integrated? How could that be slowing things down right now? And then, kind of related to that, like you're talking about cross-sell, what about the other products? Like what about CPQ and Connect and Analytics? Are you seeing any traction there or is that something else that also needs to be integrated better?

[Tien Tzuo:]

No, no. I'll give you some color there. We did acquire Leeyo a little less than two years ago, but I guess where you all coming on two years. The first year was really focused on ASC 606 and there was such a tight deadline to get the core set up, dozens close to 100 customers live on ASC 606. And so, John, that took us all the way through -- when these adoption standards were right, so I'll call it Q1, Q2 of last year. So honestly, we didn't really have time and the resources to focus on the integration between the two, until after the 606 waive was complete. So, we didn't really start heavy work on the integration until early last summer, late spring, early last summer. And long story short, we went down one direction that proved to be a dead end a false direction. We course corrected. And now I'm absolutely confident in the path that we have right now. So, look these are complex products. Everybody else has an orders based system, right, SAP, NetSuite, Oracle, we have a subscription-based system, which is a little different. And so, there were just a little bit of work that had to be done, a little bit of learning that had to be done due to integration rights. All our internal metrics of tracking these projects are really, really good. Once this is done, no one else has done what we've done and we do believe that the cross-sell machine will kick in at that point.

[John DiFucci:]

Okay. And the other products too, are they -- are you seeing any -- yes?

[Tien Tzuo:]

The inner products are home-grown products. There's no integration issues there, right? They were not acquired in.

[John DiFucci:]

Okay.

[Tien Tzuo:]

And they feel good.

[John DiFucci:]

Okay. And Tyler, you mentioned that, that you saw benefits up to billings this quarter due to early renewals that came in at 32% versus the guidance of 30% or what you thought would be 30%. You acknowledged some issues with the quarter. What was that, can you tell us what the benefit was, was it 2% or was it 4%, or if you'd give us a little bit of information around that, so we can sort of gauge what could happen next quarter?

[Tyler Sloat:]

Yes. So, I'll first describe again -- hey, John, thanks for that question. First, I'll describe what the early renewals are, right where that these -- our companies were doing upsells, right? And they have an annual term that would naturally fall into a future period and when they do the upsell, they choose to reset their annual periods. So, pulls in a billing from a future term into the current term. We saw this in Q3, it happens every single quarter, but some quarters the skew is higher than others. It's a positive thing to some extent because I mean, the customers need to buy more volume traditionally, but again we give them a choice of whether they want to reset their terminals. So, it's not really predictable. So, when we break down, how it skews for the core GEI percentages, we have the percentage, but the early renewals are the biggest factor. We also have been pretty good about continually to shift to more of an annual billings mix. So that was kind of the second biggest factor. Then the ASC 606 actually impacted self with the year-over-year compares that change your calculated billings kind of calculation a little bit. And then, this was offset by lower bookings, which we talked about, which was the challenges in the quarter itself. What we said is that, we actually expect the billings growth to be a little bit less than subscription revenue growth for Q2 and I think we guided to the subscription revenue growth.

[John DiFucci:]

Okay. But it sounds like it was more than just that 30%, the difference between 30% and 32%. I mean it's safe to assume that I think?

[Tyler Sloat:]

Yes. That's important. Yes.

[John DiFucci:]

Okay, great. Okay, thanks a lot guys.

[Tien Tzuo:]

Thanks, John.

[Operator:]

Your next question is from Chris Merwin with Goldman Sachs. Your line is open.

[Chris Merwin:]

Okay. Thanks very much for taking my questions. Yes, I just wanted to touch on the cross-sell notion a bit more. Obviously, heard what you said about the implementations of RevPro taking a bit longer than you anticipated. But, maybe can you talk a bit more about the demand you're seeing for that products. More generally, I know that most companies at this point reporting under 606 and so are you still seeing the same type of interest from potential customers? And I just had a quick follow-up. Thanks.

[Tien Tzuo:]

We remain incredibly bullish about the RevPro product. I think we've said this on previous calls, Chris that the standards really changed the rules certainly, but two things. One is the macro level trend that's pushing the shift, its dynamic business models right. Business models are not as simple as selling a product and collecting revenue on shipment or payment, there are these time based, customer-centric, usage-based models that are simply getting more and more complex. And as a result, revenue recognition is being done more and more manually outside of the ERP system. And so, a lot of companies, when we do our surveys, we'll say we got through 606, but we're doing all through manual processes, Excel spreadsheets. That creates compliance risk, that creates a longer time to close, lack of visibility in the metrics. And so, we feel really, really good about the demand. And so, the good news in all this is, there is demand for the product. And I certainly wish that we had not chased on a wrong direction with the product and to course correct, but I feel really good about what we're doing right now, and I feel really good about when it's done. This is going to be a really, really unique piece of technology in the marketplace.

[Chris Merwin:]

Okay, great. And then just as it relates to the long-term guidance, I think you reiterated the 25% to 30% revenue and billings guidance over the long-term, I think obviously this year a little bit below that, which implies an acceleration for the following year. So just when we think about the main drivers of that, like maybe can you talk a bit about what those would be and then also when you think again about the subscription economy at a high level, is it something that is so predictable in that 25% to 30% range with whole industries shifting over and is that something that can be lumpy, or do you sort of see that as a very steady growth type transition? Thanks.

[Tien Tzuo:]

Yes. So, we acknowledge the issues that we saw in Q1, but the big picture for us and the reason hopefully you hear, no change in our confidence in the long-term outlook is, is the macro level thesis remains intact, if anything is just getting better and better, right? And all we see is greater adoption of services. And so, the example we gave or the reason we're working with seven of the top 10 car companies are now the largest auto distributor and Chile is a recognition -- if my revenues are tied to car sales, my revenues will go down. But if my revenues are tied to miles driven, my revenues will go up. And this is not a situation it's isolated to that industry. And so, when I look at our pipeline, when I look at our addressable market, when I look at how differentiated our product is, when I look at the trends that are happening in terms of consumer preferences and where companies are choosing to innovate and execute on their digital transformation strategies, I feel really good. I feel really good about our long-term growth thesis. And so, I think the lumpiness is going to be more attributed to our own execution, but when you look at this is a broad-based shift that's happening across multiple industries across the world, it does continue to make us bullish about our prospects and our position going forward.

[Chris Merwin:]

Okay. Thanks very much.

[Operator:]

Your next question is from Scott Berg with Needham. Your line is open.

[Scott Berg:]

Hi, everyone. Thanks for taking my questions. I guess I got a couple here. First of all, team, can you speak to -- when was the decision made to change the strategy on the sales side? Was it something then post quarter, during quarter, just trying to get an understanding of what the timing look like?

[Tien Tzuo:]

It was post quarter.

[Scott Berg:]

Got you. And then, what's the profile of the new sales leader you're hoping to bring in, my assumption is someone externally versus an internal promotion or is that assumption incorrect?

[Tien Tzuo:]

So, two things; the thing that's been great for us is, is we have a very strong leadership team underneath, Mark, that is in place today, but I feel confident that can carry the organization forward during this interim time. For the replacement, we are going outside for our search.

[Scott Berg:]

Got it. Helpful. And then, last question from me, Tyler, you essentially maintained your EPS guidance for the year and cash flows are going to be about $2 million better than your prior guidance. Outside of the services reduction, which is, we'll call it breakeven, which obviously has no impact to either of those metrics really, if that's accurate. What is the extra cost savings come into play relative to the lower subscription revenue guidance?

[Tyler Sloat:]

Yes. We did lose a little bit of money in services where we do wanted to breakeven, and so, we're going to get it back there as we said in our call, but I think that brings the challenge for the year, but we actually did a really good job of cost management in general, Scott. I think we run a business model that tries to put us behind everything, so that when we are projecting out the stuff we haven't spent yet, if we think that the topline is going to be little bit different then we can adjust for that. And so that's what we're looking at right now for the year. So effectively, we've guided to some lower revenue, but the operating margins are going to stay the same or the operating loss is going to stay the same. And from a cash flow perspective, we're going to do a bit better than what we initially said. We still have the HQ spend that we're making as not as much on the OpEx side because it will be capitalized, but from a cash perspective that again that's driving why we have such a burn that we have this year as opposed to be even lower than that.

[Scott Berg:]

Great. Very helpful. Thanks for taking my questions.

[Tien Tzuo:]

Thanks, Scott.

[Operator:]

And this concludes the Q&A portion of the call. I'll now turn things back over to the presenters for any closing remarks.

[Tien Tzuo:]

Great. Thank you so much for joining us today and we look forward to seeing you next week at Subscribed. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.