Q2 2022 Zuora Inc Earnings Call
Good afternoon, and welcome to <unk> second quarter. That's got this often find your earnings.
[music] conference call at this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press star zero on your Touchstone telephone as a reminder, this conference call is being recorded.
I'd like to turn the conference over to.
Your house Ms Lewanda woke head of Investor relations for introductory remarks.
Thank you good afternoon, and welcome to <unk> second quarter fiscal 'twenty 'twenty two earnings conference call joining.
Joining me today are teens, though doors, founder and Chief Executive Officer, and Todd Mcelhatton.
Earnings Doris Chief Financial Officer.
Also had Ravi <unk>, our chief revenue officer, joining us for the Q&A session.
The purpose of today's call is for US to review, our second quarter results and provide our financial outlook for the upcoming third quarter and fiscal 2022.
Some.
Fashion and responses today will include forward looking statements whether as a reminder, our actual results could differ materially due to a variety of factors.
You can find information regarding those risk factors in the earnings release, we issued today and our most recent filings with the SEC and.
And final.
<unk> platform. This strategy continues to enable a lean and expand motion executed, but what I believe is a truly unique go to market organization that emphasizes long term strategic relationships with the best companies in the world.
I am happy with our overall momentum.
As we continue to execute against the fiscal goals that we announced at the beginning of the year.
Let me dive into the highlights from the quarter.
Market trends, we identified at the start of the year are continuing to play out companies are increasingly waking up to the power of the subscription model.
And we're seeing both fast growing disruptors in large enterprise incumbents.
<unk> and recurring revenue business models in both cases. These companies are looking for guidance on how to navigate their subscription journey ahead, and they're turning to zoro.
Let's take a disruptor.
At our Investor Day earlier this year, we shared the story of zoom.
We powered the torrid growth over the last 18 months.
This quarter.
Large enterprise marketing SaaS leader reported over 200% increase in annual recurring revenue from just two years ago.
And now they are invoicing more than a $1 billion in revenue across a 125000.
<unk> subscribers all through zoro billing weed.
We've been working with them since before they went public and it's our system that's enabled them to launch new offerings evolve to a multi product company.
The more complex monetization models that come with that level of sophistication.
On the other side lets looking at incumbent Who's pivoting to the subscription economy. This quarter, we signed.
100 year old Robotics company with over $20 billion in revenue who is.
Rolling out a subscription based marketplace to turn their Iot investments into new revenue streams and realizing their existing systems were not built for this new model. They chose <unk> to help them execute the strategy across the 100 plus countries that they operate in.
We're also seeing.
Seeing companies come to us or after initially selecting other solutions that simply could not deliver this quarter. We brought on a disruptor in the security space, who originally signed with a competitive solution from a CRM vendors.
And then they found themselves stuck in a never.
Ending implementation cycle and so they switched.
Zero.
Now without platform.
They will be able to manage the entire subscription monetization process and they have the agility they need to rollout new products and pricing offers into easily sign up new customers across multiple acquisition channels.
Now these are just a few examples the we believe the fast scaling disruptors and enterprise incumbent makeup the sweet spot of the subscription economy and our strategy to focus here is driving the business results that we delivered in Q2.
Now turning to product at the start of the year, we announced.
A multi product land and expand strategy designed to give us multiple paths to growth.
On the land side.
A few years ago, our <unk> billing solution with our only key beachhead now fast forward to today, we are now seeing multiples, where our product features including of course <unk> revenue.
For example in Q2, there is a company that makes smart cutting machines, we're seeing tremendous growth over the past year and in preparation for their IPO, They turn to <unk> revenue.
Automate the complexities of revenue recognition to help them become compliant with the latest accounting rules and to help ensure.
<unk> setup for additional scale for years to come.
And so in Q2, the number of customers with <unk> over $100000 or more continue to grow and we closed the quarter at 694 within this cohort up 17 sequentially.
This customer group represents 93% of our business.
And simultaneously during the quarter the ECB per customer reached a new quarterly high.
On the expand side, we're seeing a record breaking upsell numbers.
For example, Irobot initially turned to absorb billing back in 2020 to iterate quickly and test different subscription models.
They were for a new service Irobot select.
Now as these pilots progressed in the subscriber base expanded the company than invest in New York collect in an effort to reduce involuntary churn from failed credit card payments.
As another example, recently a leader in application performance management.
The company in a long time, <unk> billing customer they moved completely to a usage based model. This.
This added tremendous complexity to their revenue recognition and so in Q2. They have now added your revenue to create a complete order to revenue solution now.
Now what's enabling.
<unk> is upsell and cross sell motions as the tight tight interlock between our multi product strategy and our go to market approach and in Q2. This approach that we highlighted at Investor day continued to demonstrate tremendous progress.
In addition to lowering churn expanding sales and allowing us to hit our full.
Full year dollar based retention rates two quarters early our field organization continues to successfully take these customers live during the quarter. We saw our second highest quarterly ACB go lives, including with here technologies Monster worldwide and.
And Xerox.
And as we see.
Our go to market strategy is also about driving scale in our own operations and accelerating growth by cultivating a network and global system integrators and this strategy continued to show traction and deliver results in Q2.
First our Si partners are contributing to our growth in Q2 over.
Three quarters of our new business logos were influenced by an Si partner.
Now these deals are also coming in with a higher average selling price as we saw new customers like Daihatsu, Talis and Red Dot Com select zora, thanks to the successful collaboration with our partners.
Second our Si partners are scaling our ability to take our customers live this quarter over 40% of customer go lives actually involved a system integrator partner.
And third and finally, we're seeing our partners increase the investment they're making in zoro in Q2, we saw high.
Total digital growth of the number of certified consultants on a quarter over quarter basis, demonstrating that our partners are investing in.
Increasing the commitment to zoro, which sets us up for future growth.
In closing our strategy that we laid out at the start of the year continues.
To deliver according to our expectations. This is a story of Q2, we're seeing both fast scaling disruptors in enterprise incumbency turn to us are multi product in Atlanta expanse strategy helped us reach our full year target for dollar based retention rate two quarters ahead of plan.
Investments we made.
The OTA market are helping us successfully take our customers' lives into align with our Si partners in order to accelerate growth and scale our deployment capabilities.
Finally, we are seeing that in addition to our technology our unique expertise in the market is why companies.
Meeting our continue to turn to us to help guide them on their journey to succeed in the subscription economy.
With that I'll turn the call over to Todd to review our financial performance.
Thank you Tina and thanks, everyone for joining us today.
I'll be providing an overview of our Q.
<unk> results and discussing our financial outlook for the third quarter and full year.
As a reminder, today's discussion includes non-GAAP financial measures beginning this quarter, we updated our method for calculating certain non-GAAP financial measures related to internal use software.
You can find the details in today's press release, which includes a record.
Reconciliation table of selected GAAP to non-GAAP measures that reflect the adjustments made to both our current and prior year financial results.
Our performance in Q2 was strong across our key financial metrics.
We exceeded expectations in subscription revenue.
Total revenue non-GAAP operating loss.
Loss and free cash flow.
Two was highlighted by multi product deals with both Disrupters and incumbents strong go to market execution and great contribution from our Si partners.
We have built a strong foundation for long term growth and Q2 brought incremental progress towards our goals.
Looking ahead, we'll continue to focus on our growth dollar based retention.
And free cash flow.
So let me take you through some of the key metrics this quarter.
In Q2, our dollar based retention rate was 108%.
A significant improvement from 99% in the prior year.
As we lapsed the higher churn levels that we experienced in Q2 of last year.
Along with our focus on retention and up sell.
Looking at our customers at our over $100000 in HCV. We ended with 694 customers. This group of customers represents 93% of our business.
We closed two deals with ACB of $500000 and above the same number as a year ago as Tim noted during Q2, we reached new quarterly record for ACB core customer.
Turning to transaction volume our systems process $18 billion of volume in the quarter.
<unk>.
Representing 42% growth year over year, while process transaction volume is helpful. In understanding how much of our customers' business is running on our platform. It does not track linearly with quarterly revenue as customer gains efficiencies as they scale.
Let me review our.
Q2 financial results subscription.
Subscription revenue grew 23% year over year to $71.5 million and represented 83% of total revenue.
Note Q2 subscription revenue included some one time nonrecurring benefits totaling $1 one.
Quarter, $1, which were not reflected in our prior Q2 guidance. This was primarily related to revenue, we recognize upfront which was not anticipated in the quarter.
Professional services revenue decreased 10% year over year to $15 million.
As Tim mentioned, we continue.
Millions of progress on our strategy to shift more services to our system integrator partners and.
And we view this continued decline in service revenue as a positive trend.
Total revenue closed at $86.5 million in Q2 and grew 15% year over year as previously mentioned, our overall revenue growth was impacted.
To make by our strategy to reduce the mix of our direct professional services towards our Si partners. This not only enhances our go to market opportunity, but also benefits. Our overall gross margin as a result of our success in driving more professional services to our Si partners non-GAAP blended gross margin was 64% an improvement.
<unk> approximately 90 basis points over the prior year.
Non-GAAP subscription gross margin was 79% the same as Q2 in the prior year.
During Q2, we made the decision to accelerate the move out of our data center to a cloud hosted service, which will enable us to operate.
Movement more efficiently and offer us additional capacity as we scale over the long term.
In the short term will occur additional hosting expenses to make this transition.
During the second quarter, we recognized <unk> $6 million of additional expense and expect to incur $2.8 million of expense and our cost of goods sold.
During the second half of this fiscal year.
Non-GAAP services gross margin was negative 7% driven by investments in training, our partners and onetime employee related benefit. Our goal is to continue to run services at or near breakeven for the near future.
As we further engage with our Si partners.
Non-GAAP operating loss was $3.9 million in the quarter compared to <unk> $6 million in the prior year adjusted for the non-GAAP accounting changes mentioned earlier.
This was driven by additional investments in sales marketing and.
And R&D.
This resulted in non-GAAP operating margin of negative four 6% a decrease from breakeven in Q2 of last year.
As I shared with you on our last earnings call operating margins will be roughly flat this fiscal year as we absorb expenses, which weren't included.
And last year and accelerate investments.
Now looking at a R and free cash flow.
Earlier this year, we introduced some new kpis to help investors track, our progress, including a our growth I'm happy to report that in Q2, <unk> grew 18% year over year.
This was ahead of our target of 17% a our growth for the fiscal year.
This was driven by strong upsell performance as well as new business. We continue to focus on our objective to reach mid term AOR growth of 25% to 30%.
Free cash flow was negative $4.4 million.
Driven by the seasonality of our business and the timing of our employee stock purchase plan.
Capex for the quarter was $1.7 million.
Turning to the balance sheet.
We ended the quarter with $201 million in cash and cash equivalents.
$3.5 million dollar increase.
Kris over the prior quarter, we continue to be prudent with spend and are maintaining a healthy cash position to manage the business.
Our fully diluted share count at the end of the quarter was approximately $143.3 million shares using the treasury stock method.
In Q2 our.
Execution drove improved performance, we continue to be disciplined in our investments targeting enterprise customers focusing on the land and expand motion and working with our Si partners now, let's turn to our financial outlook.
As we shared with you on the last call. This is a year, we plan to accelerate our investments in go to market and product.
Development.
While absorbing costs that were not in our run rate last year.
That guidance includes the expenses for the data center migration in the second half that I mentioned earlier, we continue to expect to be free cash flow positive for the full year.
For fiscal Q3, we currently expect.
Total revenue of $86 million to $87 million.
Subscription revenue of $71 million to $72 million non.
Non-GAAP operating loss of negative three five to negative $2.5 million.
Non-GAAP net loss per share of minus three.
To minus <unk> <unk>, assuming weighted average shares outstanding of approximately $125.2 million.
For the full year, we are raising our revenue outlook. We currently expect total revenue of $340 million to $342 million.
Subscription revenue of 200.
$80 million to $282 million non-GAAP operating loss of -13 to minus $11 million.
Non-GAAP net loss per share of -13 to -11.
Assuming a weighted average shares outstanding of approximately $124.3 million.
In closing I'm very pleased with our performance in Q2.
We've laid a strong foundation to achieve <unk> long term objectives and are continuing our cadence of execution.
Next we will take your questions operator, please open the call for questions.
Thank you ladies and gentlemen.
Can I have a question at this time. Please press Star then the number one key on your Touchstone telephone if a class that has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question comes from the line of Brent Taylor from Jefferies. Your line is open.
Hi, guys.
<unk> from Jefferies.
<unk>.
For Brazil.
Congrats on a nice quarter I had a couple questions. One was I know the team you mentioned it.
Spoke a little bit about it.
I know your win rates, improving and that you know you're winning against some of your competitors within the space.
Can you maybe give us some context as to.
Yeah.
As you see the opportunity going forward.
Is it coming from win rates against competitors, improving or is it more greenfield as it has been think about it.
Well love it it's a great question I would say when you look.
Where our business is coming from it's certainly coming from both areas right. Its coming from companies that have tried other solutions that it doesn't work and it's also coming from.
<unk> a brand new situations look I would say this right billing.
Not in this new world of commodity in this new world companies are realizing.
Especially after last year that their customers really expect something completely different they expect a service they expect different ways of paying for the service.
A very different subscriber experience like Instagram so the instant card experience a world now used to and you really need a vendor.
And it provider.
And a technology solution from a company that's just focused 100% on this space and companies are realizing that that two <unk>.
Save money or too.
From a vendor that's not really focused on this area is not the way that they gain competitive advantage.
And then Ravi what would you say given what you're seeing.
Yes, it's a very interesting point, thank you Tina.
The same customer is also on the wall have become more sophisticated.
<unk> seen the other solutions just do not meet that.
The customers' expectations.
Ill speaking sei.
No.
Senior management.
As a company obtaining referred to.
They're looking at it they won't.
Capabilities out of the box right, while they do not want to there was a they do not want a lifetime of customization and that is also why we're saying.
These these companies come to Zara.
Got it.
Follow up if I may.
Either from Todd routine.
Our net retention rate improvements.
Yeah could you give us some context as to how.
How much of it was you know.
Yeah.
Nevertheless, improving versus a year ago and how much of it was.
Al versus and cross sells.
So I'm.
Really balanced we did a great job, we talked about the fact that we've made significant investor investments in customer success actual churn was down 50% year over year, a little more than 50% year over year as a percent of <unk> one.
One of the best levels that we've seen again in about 10 to 12 quarters. So we've done a really nice job on retaining the customers. But then again, we had a record quarter on upsells and that again continuing to be very balanced you know typically if you will.
Went back 12.18 months ago, we were much more reliant on volume.
Today, you see it much more balanced new products that we're coming off a multi product strategy is absolutely resonating with customers. So feel really good about that dollar based retention being a balanced.
Performance coming from both retention and Upsells and the upsells being across the portfolio.
Great. Thank you I'll pass it through.
Thank you and your next question comes from the line of Joseph Bobby from Canaccord. Your line is open.
Hey, guys good afternoon, and great to see the continued.
Okay.
Since then the business here.
So congrats on that so just one more on on net retention, which you know was was great. This quarter and I know you said you had a record quarter on up so I'm, just wondering how that kind of upsell pipeline looks from here.
Or.
So how we should think about maybe net retention for the rest of the year and then I have a quick follow up.
So Joe I'm first of all I think one of things we talked about at analyst day that we have an opportunity of about $450 million within our install base. So we feel there's still a lot of runway left customer.
Sure.
Or have a strong interest in new products that are coming out we see a lot of usage as you saw today on the platform. So we feel really good about what the future looks like for upsell. So from that standpoint, we feel good we hit the 105% plus where in that plus range I'm going to keep the guidance at.
From that standpoint, we certainly don't see ourselves falling backwards, but I'm going to be prudent and we will update you next quarter as we progress.
Sure Fair enough, Thanks, Todd and then.
Just Don I'd, just be curious on you know me and.
You're signing both I think the way you classify.
That that incumbents then disruptor.
And channel that's coming from them relative to your upside do you see or that Si is bringing you I would imagine more of the incumbents then they're moving with their digital transformations.
Or are they also bring a new some of the newer disrupt.
Ruptures that are actually you know.
Perhaps becoming a site customers themselves. Thanks, a lot guys.
I would really say that it's it's both especially when you look at some of the Disruptors.
They're really fast growing and you guys attracted as well there's a ton of companies that are coming up are ready and primed for the public Mark.
And when you reach that $5800.200 million inflection point as a fast growing disruptor.
Do you you know you need help right you've got billing challenges you've got compliance challenges you could ASC 606 challenges and a lot of them are reaching out to the pwc that E Y the deloitte to the world.
And that's where we really do intersect with them.
Ravi any color that you would want to add.
I think as you say there is a balance there that we're finding from our size, it's probably sort of source.
Our pipeline and influence pipeline I mean, you've seen you know that's being so much digital transformation in this space. So there's an awful lot what are helping that.
Digital transformation and at the same time as people go to those multiples.
Public offerings or whatever else. They are having a lot of help from those that saw sei. So we're seeing a very much both on the disruptive AD and incumbents.
Thanks, very much guys.
Yeah.
Thank you. Your next question comes from the line of Andrew I guess Perry from bearing Brad Your line is open.
Thanks for taking my question My first what's interesting to find two are two manufacturers among the new customer logos you you acquired.
Just wondering if maybe you could elaborate like the sales motion with those type.
Customers.
And maybe.
Elaborate as well as what kind of products what are they taking other day did they take care of it beyond billing.
Is it was there.
Some of the other strategic products that you have as well.
Yeah.
You probably know from past conversations Andrew.
I'm I'm, a huge I'm very bullish on the manufacturing sector.
So even pull back and look at 50.60, 70 years people have a sense of the manufacturing sector is starting to decline and were really seeing a major reversal of that and it's all because of Iot.
When every single physical product is connected.
The Internet the same revolution that you've found in the software sector right, where software became software as a service the same evolution you've found in Sei Entertainment and media, it's happening in the physical products world and so the manufacturing companies. We work with the common threat is they spent the last four or five years six years investing in an Iot infrastructure.
At two connecting all their products to the Internet.
Their imagination is just bursting with new revenue streams that they could get.
And some of these could be initial launches even right. We're able to help them launch a brand new Internet Iot driven service in 90 days or less and grow from there.
That's really one of the stories of let's say the story Caterpillar comes to mind in the work that we've done.
And then some of them are actually they've had a service out there for some time.
Going really really well last year. They are seeing that these are the parts of their business. Their revenue streams that are growing the fastest and they're doubling down on those areas in a company like Philips.
<unk> for example would come to mind as a as an example, there.
That's helpful and then on your certified partner count the growth it looks pretty impressive I'm. Just wondering should we use that as a metric to to cut out or as a derivative of your of your growth and your strategic partnerships.
But you know.
I think I would do that okay.
Thank you.
Thanks, Andrew.
Thank you and your last question comes from the line of Scott Berg from Needham. Your line is open Sir.
Hi, everyone and congrats on the nice numbers and thanks for taking my questions.
I guess.
I guess this question is probably for Ciena or Robby.
<unk> is an upsell and churn, but how about the other.
Net new customer sales in the quarter and the pipeline.
As you look at those deals and the three beachheads team that you mentioned that you can land with today are those deals still.
Highly skewed towards the billing side of the equation, which I think we'd probably all suspect or are you seeing nice traction with initial lands on the other two modules as well.
Yeah, Yeah, so what I try to highlight on the call is we're definitely seeing new lands with the other modules and the <unk> revenue was one of the examples that we gave me.
Overall, so we're pretty happy we're pretty happy with the new land motion, we're pretty happy with the new business. If you look at it the number of customers continues to tick up quarter over quarter and at the same time right ACB per customer on these deal the deal sizes are getting bigger as well, which is a really positive sign and so that part of the business continues.
Well and we're really happy with just with the blended aspect of the business right at the end of the day. These aren't two businesses. These are new customers coming in and we want to make sure that we continue to do that and continue to have a fantastic path for growing our value and footprint within those accounts and translating that into additional revenue.
Got it helpful and then from a follow up perspective.
Todd you've certainly highlighted the mix of our services moving to partners. The last couple of quarters I think we understand that the general progression, there, but where should services fallout either as a percentage of revenue or on a maybe on an absolute basis tier wants.
Once that move is is done and then I assume would probably work our way a little bit higher from there just in relation to the natural growth of the company.
So I think when we talked at analyst day, We said, we thought it would be around 15% it made.
It may bounce a couple of points, one way or another we will make sure we do the right things.
Their customers, but I think the Si partners that we see coming in they are training up lots of people. There are great channel for us and we're more than happy for them.
Take on that business.
Great. That's all I have congrats on the good quarter again.
Hey, Thanks again, Scott Thanks, Scott.
Yeah.
Thank you I'm showing no further question at this time I would like to turn the conference back to our CEO, Mr. Tien Zelle for any additional remarks Sir.
Great. Thank you. Thank you well before I close it out I just wanted to thank all of our Ceos there.
<unk> innovations their contribution and their continued execution. These are what really makes us who we are.
For our people are what makes for an incredible place and I'm incredibly proud of what we accomplished together in Q2 it.
It is clear from our dollar based retention performance that our land and expand enterprise strategy is working our products are resonating with our customers or our growth remains strong in the subscription economy.
Continues to have a lot of room for upside, we feel well positioned and positive about the future based on our overall momentum this quarter and we feel good about where we are thank you for joining us today.
Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for joining.
I will disconnect.
Okay.
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