Zuora, Inc.
Q3 2020 Earnings Call Transcript

Published: 5 Dec 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Zuora Third Quarter Fiscal 2020 Earnings Conference Call. I would now like to hand the conference over to your speaker today, Joon Huh, Vice President of Investor Relations. Please go ahead.

[Joon Huh:]

Thanks Josh. Good afternoon and welcome to Zuora's third quarter of 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 third quarter results as well as provide our financial outlook for our fourth quarter and remainder of the year. 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 our most recent 10-Q filed with the SEC.

[Tien Tzuo:]

Thanks Joon, and welcome, welcome to our third quarter earnings call for fiscal 2020. I'm pleased to say that we had another solid quarter. In Q3, we continued to add key customers, we were recognized for our technology leadership by one of the top industry analysts, and we continue to see strong interest in subscription businesses from the best companies in the world, across multiple industries. This resulted in subscription revenues of $54 million, representing 25% growth year-over-year as we improved our non-GAAP operating income quarter-over-quarter in ahead of expectations. Tyler will cover some of the specific financial details later on the call, but overall, it was a solid quarter as we continue to lay the foundation for sustained long-term growth. For today's call, I plan to provide updates on a few key areas that we previously talked about. First, our sales leadership transition, specifically hiring of our new Chief Revenue Officer. Second, progress on the integration between our flagship products, Billing and RevPro. And third, the adoption, we are seeing with our emerging platform. So first let me talk about what we saw this quarter in terms of overall market trends. In Q3, we continue 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 with the years ago with a simple billing system. But the more successful it 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.

[Tyler Sloat:]

Thanks Tien. As you can see we're continuing to deliver on our financial goals and improve our operational execution. As I typically do, I'll start my comments today by reviewing our key operating metrics customers over $100,000 ACV, dollar-based retention and process transaction parts. Then I'll move toward financial results and finish with our outlook for the fourth quarter and remainder of the fiscal year. Starting with customers, they still represent 88% of our annual recurring revenue. As you heard from Tien, we recently brought on our Chief Revenue Officer, Robbie, we're all working hard to improve our sales execution. We're really excited about Robbie and the sales team that's coming together, but we also know that it will take some time for the team to become operational effective and consistently land new customers in closing deals.

[Operator:]

Your first question comes from Richard Davis with Canaccord. Please go ahead. Your line is open.

[Richard Davis:]

So once RevPro is kind of integrated into the platform and you have all the CRO lined in and stuff like that, you and I've talked about this before. Is there a thought in terms of - will there be a change in the pricing like, why I have to pay more. I mean, obviously, if I can get the module that counts, but how would, should I think about your pricing model would that change at all or do you have any thoughts on go to market in that regard. Thanks so much.

[Tien Tzuo:]

Yes, right now we have no current plans of changing our pricing and so the way we sell our products is the way we sell products. You obviously know given what we do that, we do believe in the power of pricing to build long-term sustainable models, it's something we're always looking at, but at this point, we intend to keep operating the way it is.

[Tyler Sloat:]

Yes. Richard, this is Tyler. We always look at price, right, we iterate we try to learn from our customer base. With RevPro that isn't add-on and it is one of our flagship product, so it is meaningful. And so now having it is also meaningful. But we constantly look at price and we constantly iterate off a bit based on what we think customers are going to pursue from the value of what given.

[Operator:]

Your next question comes from Stan Zlotsky with Morgan Stanley. Please go ahead. Your line is open. Stan Zlotsky with Morgan Stanley, Please go ahead, your line is open.

[Unidentified Analyst:]

This is Sarah on for Stan Zlotsky. We're growing the downtick in net retention this quarter, last quarter you called out a higher number than usual of customers rightsizing and kind of 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:]

That’s a tough one to answer. No, we did call out a couple of down sales over the last quarter, we also said that going forward, we kind of gave a heads up that we could see some pressure on this number this quarter. We kind of 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 kind of just normal course of business.

[Operator:]

Your next question comes from Brent Thill with Jefferies. Please go ahead. Your line is open.

[Luv Sodha:]

Hi, this is Luv Sodha on for Brent Thill. Thank you again for taking my question. Just a couple of questions, one was on, I know in the previous calls you guys outlined some of these initiatives on the sales side, now that you hired is Robbie, is he sort of implementing those same initiatives or is he giving - is he being given more leeway in terms of what he can and cannot implement. And then the second one was for Tyler or Tien as well. Now that you've recruited James Huang and he is building out GSI pipeline, will that lead to faster deployment times if you will, and over the longer term, will that help ease out the deployment process? Thank you.

[Tien Tzuo:]

Yes, absolutely. I'll go into the first one, I mean as you can imagine I'm incredibly pleased to give a hand over the range on some of the projects that we've been doing. We ended off to a professional like Robbie, I would say that as part of the process of coming together of interviewing, we certainly found that we are very aligned in our thinking. But I would also say that Robbie comes from an environment at Adobe, where he is selling to the largest companies in the world on digital transformation projects right, and this is the big part of our growth. And he is seeing success on how to scale a sales process that is more about that type of complex sale and so I think he’s taking what we've done, necessarily expect them to bring it to an entirely new level. And certain drive the growth of our Company. And so I wouldn't say that we should expect these undue - everything we did, but I would say that I would extremely expect to add to it and making much longer.

[Tyler Sloat:]

Well, I guess I can talk to the last, the second part of the question, which was around the addition of our new head of alliances James and kind of what we expect to happen there. I think you specifically asked, do we expect a point in time to get shorter. The first thing that use relatively new with Robbie part of organization and we're really excited to have more, we are seeing, as we mentioned in the past, a lot of great traction of the deal size, but then these kind of partnerships take time to build. It might sound counter intuitive, but in some cases, at the point is might actually get bigger because - but the GSI's will be taking them over. So that, I mean, not necessarily on our P&L. The reason is either some large digital transformation that is where just be a piece of an entire stock that we're now seeing GSI's wanting to build into our architecture. And so when we look at this, and we say how can we be expert services and always maybe evolved, but get as many GSI's - as possible. On the flip side, we are also working on customers we're just launching and in that case, trying to reduce the time to deployment to get the line as fast as possible, utilizing our technologies and so we're actively working on that as well.

[Operator:]

Your next question comes from Chris Merwin with Goldman Sachs. Please go ahead. Your line is open.

[Chris Merwin:]

Hi, thanks very much for taking my questions. I wanted to ask about Zuora platform. I know we'll get to see that these are group meeting a few months back, but just curious like any used cases, you can highlight so far, any potential customers using the product, how we should think about adoption trending there. Thank you.

[Tien Tzuo:]

Yes, thanks for asking about the platform. This is obviously an area that we're excited. But I'm really excited about. We try to highlight a few examples from the call. And so, there is one about a media company that really look to move a lot of collections processes, if you will into the system. We highlighted Hudl sports analysis software company that was really automated a whole bunch of different bunch of sale processes and then we highlighted Motor Trend Group in a similar capacity. It works about 100 customers, I would say that are using the platform actively and this is really up from 0 when we launched this in June or a handful of beta customers, if you will. And so really pleased with the progress and yes, as you can expects the whole purpose of the platform is to allow customers to do the last-mile customization and so the diversity - but we're starting to see is completing exploding. I mean we're seeing companies track utility metering, we're seeing company track big numbers of acquirers raising the system through customizing capability and so really pleased with what we're seeing in. It's kind of tied to the question before. We also do believe that this is a big part of being able to work with size right that there is actually more customization that has to be done from the last-mile customizations. And that's where the GSI simply step in and help us do a lot of that work.

[Tyler Sloat:]

And, Chris, just to follow up. We are super excited what we're seeing with the customers. You can actually we're learning as well from the customers, but we are early in the monetization strategy and journey on. We're charging forward, but what we're - I don't want to say, we're not looking to optimize that yet because we are learning about how our customers are using it and that will evolve over time. And so we've been limited about that from last couple of calls and that's still constant.

[Chris Merwin:]

And maybe just one more follow-up on verticals and apologize if this was addressed before, we're just jumping between a couple of calls. And any new industries or certain projects new businesses within new industries where you're starting to see more traction that you're getting more optimistic about that you'd call out?

[Tien Tzuo:]

Yes. So, we see a lot of buys a lot of industries. And so you'll see some financial services industries, you see some health care industries right, but I would say those are more isolated one-offs right now, we're certainly monitoring. The one that we were that we're seeing more traction of any quarter we seem to announce a couple of more customers is utilities and there is something like utilities that are moving away from pricing models that have been fixed for 10, 20, 30 years into more of these dynamic energy of user service model. And so we announced two - we had two press releases this quarter right with two utility companies, and one is France and one in Australia. And that really joins a bunch of our other companies like Origin, Centrica, A2A and so we're keeping our eye on utilities and seeing if that does become an emerging vertical for us.

[Operator:]

We currently have no further telephone questions at this time. I'll turn the call back to management for closing remarks.

[Tien Tzuo:]

Thank you so much for joining us today and we look forward to hearing from you. Please let us know if you have any questions and we'll talk to you next quarter.

[Operator:]

This concludes today's conference call. Thank you for joining us. You may now disconnect.