Zuora, Inc.
Q4 2020 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

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

[Joon Huh:]

Thanks, Elian. Good afternoon and welcome to Zuora's fourth quarter and full fiscal year 2020 earnings conference call. Joining me today are Tien Tzuo, Zuora's Chief Executive Officer; and Tyler Sloat, Zuora's Chief Financial Officer.

[Tien Tzuo:]

Thanks, Joon. Thank you, and welcome to our fourth quarter and our full year earnings call for fiscal 2020. Before we get started, let me first address the current situation with the coronavirus and how it is impacting Zuora. Our top priorities in this situation are clear. They are to keep our employees safe, to continue to serve our customers and partners and to do our part in preventing the spread of the virus. In terms of day-to-day work, we are confident in our ability to continue to deliver our services as usual. We run a mission-critical system. For over a decade, we continuously developed, enhanced and maintain our business continuity and disaster recovery plans to ensure that our business, our customers’ business are able to run smoothly. We have a resilient and distributed infrastructure. We have a global workforce, one that is already adept at remote work in virtual collaboration. And so we expect to be able to continue to support our operations 24/7, 365 or 366 days of the year. We also recognize that we have a larger role to play in our communities and are doing our part to minimize any contribution to the spread of the virus by strongly encouraging employees to work from home, to practice healthy habits, cancel large gatherings and pausing all nonessential travel. We've also made a difficult decision to cancel the in-person components of our annual Subscribed 2020 Conference. In order to prioritize the health and safety of our global customers, partners, employees and everyone who helps put on Subscribed. We plan to replace the in-person event with videos and live stream content throughout the year.

[Tyler Sloat:]

Thanks, Tien, and thank you, sincerely, for the kind words and the great journey we've had together. I have some personal words that I want to cover at the end. So for now, let's just - let's go through the numbers and performance. So we've delivered another quarter of healthy subscription revenue growth of 21% and had our highest quarterly billings number ever, representing 25% year-over-year growth. And we met our non-GAAP operating loss target of negative $10.5 million. Let's start with our key operating metrics, and then I'll discuss the transaction volume processed on our platform in the quarter. We had a lot of new logo activity in the quarter, resulting in account of 624 customers with over $100,000 ACV at the end of the period. This is a net add of 38 from the prior quarter and our highest increase ever. This customer group now represents 90% of our annual recurring revenue, as it continues the trend to becoming a larger part of our business. In this quarter, as CRO, Robbie's team did a really good job of landing new logos and customers to close out the year. Turning to net expansions and upsells. Our dollar-based retention ended at 104%, slightly down from the prior quarter as we had expected. As a reminder, this is a trailing 12-month metric. So we continue to feel the impact of the lower upsell and downsell dynamics from earlier in the year.

[Operator:]

First question comes from the line of Chris Merwin from Goldman Sachs.

[Chris Merwin:]

Thanks so much for taking my question. Maybe, firstly, I just wanted to ask about RevPro. In other words, a few customers last quarter that you talked about going live this quarter. Anything you could say more about other few customer wins there? And how we should think about that impacting your model as we go throughout the year? Because I know, in particular, you talked about an acceleration in the back half? Thanks.

[Tien Tzuo:]

Yeah. So as you know, we've been on this journey to deliver the integration between these two products, and that has gone well over the last few quarters. And so we're under deployment. The deployment is going well. We're starting into the new fiscal year, if you will, past the Q4 go-lives. And so now customers really are coming live and giving us just increased confidence that the integration is solid. And we do expect to turn back on the upsell motion.

[Chris Merwin:]

That's great. And then, as it relates to the shape of the year, I know you talked about, I think, an acceleration in the back half. And I think one of the kind of speed bumps in the quarter was churn. I think your customer churn picking up a bit. So can you just talk - maybe two part question, talk a bit more about what caused that churn? And then also your visibility and confidence to do the acceleration in the back half and what implicitly you're assuming for churn there? Thanks.

[Tien Tzuo:]

Yeah. We flagged that it was a minor uptick. It was really - we had a couple of customers that were acquired by larger companies, right? These larger companies might have run another solution. And we have a really, really sticky product, in general, right? But sometimes the larger companies do decide to move the systems onto their own internal systems. There is also a couple of business failures, too. I mean, some of these business failure are the ones that you've actually seen in the press. And so it was really just a confluence of some of those events, but we feel really good about our position, because the core product is fundamentally a very, very sticky product.

[Chris Merwin:]

Great. All right and all the best Tyler and Tien giving me opportunity. Thanks so much.

[Tien Tzuo:]

Yeah, absolutely.

[Tyler Sloat:]

Thanks, Chris.

[Operator:]

And our next question comes from the line of Brent Thill from Jefferies.

[Luv Sodha:]

Hi. This is Luv Sodha on for Brent Thill. Thank you.

[Tien Tzuo:]

Hello.

[Luv Sodha:]

Hey, Tien. How are you doing? Just wanted to ask a quick question on coronavirus, maybe the macroeconomic impact. I know that given part of your pricing is based on transaction volume. Let's say, if there was an impact - macroeconomic impact and transaction volumes were to slow down, do you guys have any comments on how that would impact revenues going forward?

[Tien Tzuo:]

Yeah. I think, Luv, I think - this is such a new state for so many of us, right? And those of us who were around in 2008 certainly remember market gyrations, but the whole coronavirus thing is going to be something new. We have customers where you can see that this is actually helping them, right? More people staying home, more people asking for subscription services, but we have the other factor as well. And so I think it's just too early to tell. I think what we're focused on right now is making sure that we continue to execute the company, right? We continue to serve our customers, right? We feel really good about our ability to, obviously, keep the service up and running, right? That's not really impacted. But we want to make sure that as we shift to moving more employees at home. I mean, the good news is already distributed workforce. The good news is we've already adopted a lot of the technologies that companies are using. But this is certainly a situation that we're monitoring, along with everybody else, just because it's so new.

[Luv Sodha:]

Got it. Got it. And congrats, Tyler, on your new role. Just wondering, I mean, in terms of the transition, I know you have someone filling in for the near term. But I guess, how far along are you in the search? And how soon can we expect sort of news for new CFO?

[Tien Tzuo:]

Yes, I'll go ahead and field that. I mean, the good news is Tyler has built an amazing team of incredibly strong leaders. And so we will be creating an office of the CFO that's led by one of the leaders. We're fortunate to have Ken Goldman, who's been a major adviser to us for a number of years, have been on the Board since 2017, and he will continue to play a very strong role. And we have retained a leading search firm to really help us run the right process, right? Whether it's an internal candidate or an external candidate, we want to make sure we run the right process and just get a fantastic leader to step into Tyler's big shoes.

[Luv Sodha:]

Got it. That’s all from me. Congrats, Tyler and I’ll pass through.

[Tyler Sloat:]

Thanks, Luv.

[Operator:]

And your next question comes from the line of Terry Kiwala from First Analyst.

[Terry Kiwala:]

Hey, good afternoon. And thanks for taking my questions. I'm wondering if you could talk a little bit about in the quarter and then moving forward, whether you saw any elongation of the sales cycle or material changes in your close rates?

[Tien Tzuo:]

Well, when I look at the Q4, we actually saw that on our win rates improve and our sales productivity numbers improved. And so we feel fairly bullish about the business. If the question is really related to what's going on right now with the travel bans and so on and so forth, I think, it's too new, I think we're all taking it day by day.

[Terry Kiwala:]

Great. Thank you.

[Operator:]

And your next question comes from the line of Stan Zlotsky from Morgan Stanley.

[Stan Zlotsky:]

Hey, guys. Can you hear me okay?

[Tien Tzuo:]

Yeah.

[Stan Zlotsky:]

All right, perfect. So a couple of questions from my end. First on just the way you think about guidance for next year, I realize everything is still really new. But as far as how you approach your guidance setting methodology between Tyler leaving and all the uncertainty out there, do you consider potentially maybe widening out the ranges for your guidance, beyond typical in order to account for the uncertainty? Or maybe just tweaking some of the close rate assumptions? Or at least maybe the timing of those deal closings?

[Tyler Sloat:]

Stan, this is Tyler. I'll take that one. I mean, when you look at the kind of macroeconomic environment right now with coronavirus and all that, we said we haven't actually taken into account any changes based on that, because it is too early. And as Tien mentioned for Q1, we'll look at those sales cycles. I think, in general, though, if you look at what we've been talking about, we made a lot of changes last year as we brought Robbie onboard, the execution was really, really positive in Q4, but it does take time for everything to filter through. And we said, I think a lot of the changes in the execution you'll see it in the numbers coming in the back half of the year. So we give guidance based on our best picture of the business today. We haven't changed that going into this year based on what we see.

[Stan Zlotsky:]

Got it. Got it. Okay. And just similarly, on the implementation side of the business, from a services side of the business, considering that you guys do have a fairly heavy lift from an implementation standpoint, how are you guys thinking about getting customers up and running with some of the travel restrictions around getting people on-site to do the work?

[Tien Tzuo:]

Yeah. I would say we've looked at that pretty deeply across the entire parts of the company in terms of making sure that we can continue to serve our customers, right, whether that's on the technology operation side, certainly, on the sales side, the engineering side. There's been parts of the world that's where coronavirus had hit earlier, and we've had a lot of experience making sure that working at home doesn't impact productivity. Bringing customers live is the same thing. We already do actually a lot of that work remotely, right? There's certainly upfront in the blueprinting phase that we're looking at and seen it, let's make sure we can do that. We have a fairly good methodology. That's what's allowed us to really have a consistent pace of customer go-lives. That knowledge is pretty well documented. And right now, we're in the process of making sure that we're training up our partners and educating them, so that we continue to get leverage in the organization. But at the top level of your question is, we don't think that working at home is going to slow us down in terms of our ability to deliver for our customers.

[Stan Zlotsky:]

Got it. And maybe just - and my apologies if this already was asked and you guys have answered, but I'm just jumping between a couple of calls. But - when you think about growth potentially accelerating into the mid-20s by fiscal '22, what are the puts and takes to get there? Is that some maybe slippage out of this year or maybe some of the longer deal cycle, though, this year closing in next year? Or is it - is there something more fundamental that you're seeing in the pipeline?

[Tien Tzuo:]

No. No, there isn't. I mean, fundamentally, we believe that we are in a fantastic market, right? It's a long-term market. None of the fundamental story is intact, but we're really trying to make sure we emphasize is more and more of the subscription economy marketplace is not just these fast-growing disruptive companies, right? These companies, Zoom and Foresight are two that we referenced. But we're just seeing a lot of traditional companies outside of high tech moving to the space. And so the initiatives that we're really executing are to make sure that we continue to land these large company logos that ultimately provide incredible expansion potential. And so we highlight the SNCF example as a company we started working with two years ago, had an amazing launch that was a huge success, and now they're shifting the entire business over to us. And so those initiatives and Robbie being 90 days into the role, is having to say, look, Q4 and the performance we saw shows that the thesis of the marketplace is intact. It shows that we continue to have a strong technology lead. We're in the sales cycle. It shows the value of strong sales leadership. But Robbie is also new, we're entering a new fiscal year and we want to make sure, right, there's time for all the initiatives to really take hold. And so it makes sense really that the leverage and the business momentum that we'll see from these initiatives is really more in the back half of the year, it'll show up in revenue numbers, right, given the subscription-based business model in the middle of next year.

[Tyler Sloat:]

Yes. Stan, if you look at what we really kind of worked on this past year, and we argue we'd paid the price for, which was kind of go-to-market leadership uncertainty, right? Our RevPro and Billing integration, right, and really starting to put together our partner focus. We invested for the last six months and we're starting to see the light on some of these things. It's still going to take some time, but these are things that give us confidence as we move forward. The hardest parts are behind us.

[Stan Zlotsky:]

Got it. Very helpful. Thank you, guys.

[Operator:]

And there are no further questions at this time.

[Tien Tzuo:]

Great. Thank you so much for joining us, and we'll talk to you next time. Thank you.

[Operator:]

Goodbye. And this concludes today's conference call. Thank you for your participation. You may now disconnect.