Zuora, Inc.
Q2 2019 Earnings Call Transcript

Published: 28 Aug 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 Second 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 the call over to Joon Huh, VP of Investor Relations. You may begin the conference.

[Joon Huh:]

Thanks, Chris. Good afternoon. And welcome to Zuora’s second 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 second quarter results, as well as provide our financial outlook for our third quarter and the remainder of the year.

[Tien Tzuo:]

Thank you, Joon, and welcome. Welcome to our second quarter earnings call for fiscal 2020. The headline is that we had a solid quarter. Our second quarter financial results came in largely better than expectations, while we continue to focus on improving our operational metrics. Subscription revenue grew 24%, while professional services increased 12%, resulting in total revenues of $69.7 million, representing a 21% year-over-year growth and we outperformed on operating income as we saw some savings in the quarter. Tyler will cover financials in greater detail later in the call. In Q2, we continue to see signs that support our central thesis. That our core market remains strong and that we are in the early stages of a broad shift to subscription business models, a shift that we believe will ripple through every industry. And that the needs of the companies in this new world cannot be met by traditional product centric ERP systems that are not designed for customer-centric, subscription-based business models. In Q2, we continue to sign on customers, and of course, our technology vertical, such as Seiko Epson, Omnitracs and Virtustream, but we also continue to see strong demand outside of the technology vertical. For example, this quarter we signed one of the largest electronic manufacturers in Japan. We signed a major manufacturer of ball bearings in Europe. Yet another automotive services provider, one of the largest global consulting firms and one of the top three educational publishers in the United States. So the shift to subscriptions remains strong. We also saw successful go-live deployments for key customers, including Airbus, Diamond Inc., Hudl, Penske Media and Poly, the merger between Polycom and Plantronics. In Q2, we also shared some great stories, like our StackPath, a platform for secure edge services is taking advantage of our new central platform to build and automate key workflows, which we will talk about later.

[Tyler Sloat:]

Thanks, Tien. This past quarter we made a lot of progress to improve our operational execution, which is reflected in our Q2 financial results. Let me start my comments today by reviewing our key operating metrics and cover our financial results and finish with our outlook for the third quarter and the remainder of the fiscal year. Beginning with our customers, we ended the quarter with 566 customers over $100,000 ACV, which reflects a net add of 20 customers over the quarter and 19% year-over-year growth. As Tien mentioned, we have made changes to our go-to-market methodology and updated our sales approach. We are optimistic about these changes. But it will take time to realize the benefits in terms of landing new logos and expanding with existing customers. The good news is that we continue to see a steady trend of increasing average ACV within this customer base, which means our customers are growing on our platform and placing more value on our products, customers over $100,000 ACV now represents 88% of our annual recurring revenue in Q2.

[Operator:]

And your first question is from John DiFucci with Jefferies. Your line is open.

[Luv Sodha:]

Hi. This is Luv Sodha on for John DiFucci. Thank you for taking my questions. I just had two quick questions. One was on the net dollar retention. You mentioned that fell to 107%. Could you provide some additional color because transaction volume seem to have increased impressively this quarter. So was there any change in like renewal rates or anything else?

[Tyler Sloat:]

Yeah. I can take that. Hey, Luv. This is Tyler. We -- so we said there was really two things that impacted the net dollar retention. The cross-sell motion between Billings and RevPro, where we kind of -- we have talked about that after Q1 call that we kind of pause that until we can get a bunch of our backlog customers successful and because of that slows down your upsell motion, right? And we talked about the transaction volume, as a reminder, the purchases of transaction volume precedes the actual volume that flows through our system. So as we report each quarter, right? That’s probably reflective of something that’s already been purchased. And what we mentioned in the call just now that sometimes as customers get to the end of their contract terms, they renew for something less than what they would have had. So we did see some down sell, which pushes down your dollar net retention a little bit.

[Tien Tzuo:]

Yeah. Just to add some color to that, right? Just visualize some customers will sign a three year contract with expectations of perhaps even something they launched, even if they generate a certain amount of revenue, some percent of those customers are going to way exceed their launch expectations, right, and that results enough sales. But this quarter we did see a fewer renewals where they did not hit their launch expectations and resulted in a reduction of the transaction volume. And so we are going to see some quarter-to-quarter fluctuations depending on the mix of that specific quarter.

[Luv Sodha:]

Okay.

[Tyler Sloat:]

But as a reminder, the transaction volume we process is not really a correlation for up sales in that quarter.

[Luv Sodha:]

Got it. Thank you for that. And just one quick follow up, if I may. So thank you for the comments on the sales, the changes that you have made to the sales execution. I just had -- so you mentioned an updated sales formula. I just wanted to ask a little bit further on that, has the go-to-market motion changed dramatically or how has the conversations that you have with customers changed?

[Tien Tzuo:]

Yeah. I wouldn’t say it’s changed dramatically. I think, the -- what I was trying to highlight was, if you think four years ago, certainly, some of the company mixes are a little bit different. We see a lot of manufacturing companies, we see utility companies, but the bigger change, I think, is four years ago, we had to do a lot more work convincing people that billing was important. And now these companies are coming to us and like, I mentioned, the good news is, they are looking for a billing solution, right? We don’t have to do as much work. But there’s still a mix of maturity and so some companies, we have four motions if you want to simplify it down, companies might be coming to us, saying, we want to launch something, companies might be coming to us, saying, look, we put in a commercial billing system, we put a homegrown billing systems years ago and it’s no longer working. It might be coming to us, saying, we are doing more and more revenue recognition spreadsheets, because of all these new business models and that’s killing us or the SIs might be saying, look, as part of your digital transformation, you have got to do a complete full to cash transformation. And so honing down on these four types and updating our sales formula to talk more match our customers are buying today was part of what we are doing. But the conversations are still the same conversations.

[Luv Sodha:]

Perfect. Thank you again.

[Tien Tzuo:]

You bet.

[Operator:]

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

[Tien Tzuo:]

Hi, Scott.

[Scott Berg:]

Hi, Tien. Hi, Tyler. Thanks for take my questions. I guess, Tien, I would start off with the sales changes in the quarter and then roll that forward to comments on your overall pipeline. With the changes that you made in the quarter, how did sales trend relative to your expectations when you started the journey around these changes in the sales arc?

[Tien Tzuo:]

The sales haven’t changed significantly. One of the things that we don’t -- we didn’t touch on, because the work was really done really was -- we did have a much tighter forecasting, much more disciplined forecasting process as well. And what we are seeing really is the learning of the new reps, right? Now that the change in the structure that we have done, right? Allowing our newer reps to roll into more experienced reps, giving them a more specific sales formula, a recipe that matches our customers want to buy, right? These are the things are just general focus on an operational execution. And we are definitely seeing early signs of this when I talk to the reps, right? When I joint deals and I see how they are doing. But we just want to also caution that that typically these things do take several quarters to play out and really crystallize inside, right, organizational change does take time.

[Scott Berg:]

Okay. Fair enough. And then, how would you characterize the sales pipeline today relative to a year ago?

[Tien Tzuo:]

We still see strong demand. You can feel it, right? You can feel it when you look at all these news reports, companies are continue to move aggressively into launching subscription services or finding that their subscription services are doing really, really well and looking to scale these subscription services and so I don’t think there’s any change in the market. This is really our own execution.

[Scott Berg:]

Okay. And then a quick follow up for Tyler. Tyler, on the Professional Services that did break -- in a breakeven level in the quarter, as you mentioned. How should we feel the -- how should we view the margins on that business going forward? Is this kind of a new level that you can sustain or will this may be kind of fallback in that low burn rate that you have seen over the last couple of years? Thank you.

[Tyler Sloat:]

Yeah. I do think there’s going to be some quarter-to-quarter fluctuation there, Scott. We -- and I think we could shift to some low burn. Our goal is to run that business on a non-GAAP breakeven basis. We experience some really positive things on the services side this quarter in terms of utilization, right, and things like that, compared to Q1, we benefited from a couple of extra days. But I could see as, we could see some fluctuations, especially as we kick and hiring and you have people ramping and things like that as well. So I wouldn’t expect it to just be breakeven, it could fluctuate slightly. But again the goal is to have a breakeven from a non-GAAP perspective.

[Tien Tzuo:]

I am really happy with the operational discipline we have in that part of the business. So, of course, there’s always going to be some quarter-to-quarter fluctuations, but the discipline the rigor of how we manage our businesses is fairly solid.

[Scott Berg:]

That’s all I have. Thanks for taking my questions.

[Tien Tzuo:]

Thanks, Scott.

[Operator:]

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

[Chris Merwin:]

Hey. Thanks for taking my questions. How are you doing.

[Tien Tzuo:]

Good.

[Chris Merwin:]

I just wanted to follow up real quick on net retention. As I understand it, just in terms the way it works, you get the customers you pay kind of the platform feed and they are paying in volume blocks. And to the extent that they bought bigger blocks than they thought initially was just a function than overestimating kind of the pace of their growth. Just wondering if I could better understand just those down, so that you saw in the quarter that have something that should probably correct in time and then I have a follow up. Thank you.

[Tien Tzuo:]

Yeah. That’s right. That’s right. And it really speaks to just the range of customers we have, right? So if you are talking to a company that’s they are well on their way to subscription journey, perhaps, 100% of businesses subscriptions, maybe they are $100 million company, maybe they are a $1 billion company. You are obviously not going to see that bigger range, right, because they can estimate. But we do sell a lot of situations to a launch or an early stage subscription offering where you just going to see a lot of variation, right? They are committed to the offering. They might sign a two-year or three-year contract with a set of expected volume that does not necessarily materialize. The other factors we sometimes see is some of our customers will get acquired into a bigger company and you see both the facts, you will see the bigger companies able to accelerate that division’s revenue. You also see not a surprise, right? You guys to see those other companies where the bigger company actually slows down the acquired companies revenues. And so, you are going to see some level of variation, just given it is, I mean, we -- what we believe is as we get bigger as the industry matures, right, as we could continue to get bigger and bigger levels of scale that that variation will reduce over time. But for now, you are going to see some quarter-to-quarter fluctuations on that.

[Chris Merwin:]

Okay. Great. And then, Tien, maybe one more for you, just on the platform, I mean, just guess there is any feedback that you have got from customers so far, are there any initial deployments out there. I am just curious, like, what type of customers are taking this product, what they are using it for and kind of how we think about this folding into the model and in time getting their attention or many of those other APIs? Thanks.

[Tien Tzuo:]

We just announced this platform in June. Certainly it’s been in a more of a limited availability before that and so this is a fairly new product. And the early signs are that, the early signs are, well, call these last mile customizations. A lot of it is around things like orchestrating the customer experiences, right? Where you see a lot of variation in terms of how companies want to operate from one company. Every company has a very specific experience they are trying to create for their customers, whether it’s changing account profile or signing on a new customer or when your customer change their add-on products. And the platform, specifically, the workflow tool really allows them to do those last mile customizations without a lot of work. And so previously, they would have to build a lot of these things with custom code, find a place to host it, right? Do a whole bunch of calls back to our APIs. Now they could do it in platform, if you will. And so the early signs are that the amount of work it takes to do any specific, say, flow is being cut down by 70%, 80% or 90%, right? Again, this is early signs of the customers that are using it. So you are seeing them be able to customize our overall billing system, right, down that last mile because customization to their specific needs. I flagged in couple of metrics on earlier conversation, okay? Well, how does that translate? So that should translate into faster deployments, right? That should translate into easier last mile customizations and that should translate into a wider footprint that we have if you measure that, say, by the number of processes that we cover inside the application itself. That, ultimately, hopefully translates…

[Chris Merwin:]

Okay.

[Tien Tzuo:]

… into -- yeah, let’s stick your product and faster growth.

[Chris Merwin:]

Perfect. Thank you.

[Tien Tzuo:]

Thanks, Chris.

[Operator:]

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

[Mark van der Zwan:]

Hey, guys. Mark van der Zwan for Stan Zlotsky here. Thanks for taking my question. So there’s a press release out. You actually note on your script from Omoove and Italian car sharing company. So about that, I mean, have you guys seen any traction outside of Western Europe where you have been seeing a lot of traction, like, maybe APAC or I am just kind of more on that international opportunity?

[Tien Tzuo:]

Yeah. I mean, well, we do see this subscription economy certainly is not limited to any specific countries. And we continue to see, call it, 30% of our business is coming from an international regions. Just this past quarter, for example, our Nordic region is really starting to come on strong. The ball bearings company that we talked about is in that part of the world and so international becomes -- it’s still remains really, really important. We still think there’s a lot of growth opportunity in the countries that we are already in, right? So this is being the Western Europe. This may be Japan. This may be Australia, New Zealand. And so right now, I wouldn’t say that we are focused on expanding beyond the countries that we are already in.

[Mark van der Zwan:]

Awesome. Thank you. And then maybe one quick follow up. I think customers over $100,000 in ACV. It grew 19% year-over-year this quarter. I think that’s like compared to 28% a year ago and 24% last quarter. Anything in particular for this, any like large deals kind of slip in or out of the quarter and how should we think about this moving forward? That’s it for me. Thanks, guys.

[Tien Tzuo:]

No. Let me just remember, we continue to obviously the closed companies that are $700,000, we see this as the startup tech community and our goal is, if you close 10 companies, there are two of them will become the next Zendesk, right, the next Box, next Floorsite and we certainly see that happening. We also flagged in the last in our Investor Day back in June that if we are at a $1 billion, call it, 4 time -- 4x growth, we wouldn’t expect for 4x growth in our customer base. And so we would expect that our footprint within our existing customers continues to grow as well. And so -- and you are going to continue to see that effect. But I wouldn’t say there’s anything to call out with that.

[Mark van der Zwan:]

Got it. Thank you.

[Operator:]

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

[Scott Berg:]

Hi, Tien. Just a quick follow up. I forgot to ask about this Nike deal that you guys look like you may be signed in the quarter or the prior quarter. Can you help us understand maybe how Nike is using your software?

[Tien Tzuo:]

Yeah. I think you are talking about a commentary that we did on Nike’s announcement. And so we are working with a number of fitness companies, I would say, right? But we don’t have any specific announcement of a specific company. We are just seeing that the fitness sector, if you will is very much in motion and we took Nike’s announcement of their offering as a chance to comment on that broader trend that we see. We are really excited about fitness. I mean, the bigger picture is, if you are a consumer and you have called it $20, $50 to spend every month. Where do you spend it, right? You spend it on a gym membership. Do you spend it on peloton, right? Do you spend it on one of these fitness applications? Do you spend it on these boot camp places, right? And we are seeing this all really come to a head and there’s a lot of disruption and innovation happening in the entire sector.

[Scott Berg:]

Got it. Helpful. Thank you.

[Operator:]

Ladies and gentlemen, this concludes the Q&A period and today’s call. Thank you for joining. And at this time, you may now disconnect.