Q3 2023 Zuora Inc Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Zoro third quarter fiscal 'twenty 'twenty three earnings call.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw the question again press to Starwood. Thank you.
Luann awoke VP of Investor Relations you May begin your conference.
Thank you good afternoon, and welcome to the worst third quarter fiscal 2023 earnings conference call on the call today, we have James though the worst founder and Chief Executive Officer, and Todd Mcelhatton doors, Chief Financial Officer, Robin <unk>, Our President and Chief revenue Officer will also be joining us for the Q&A session.
During today's call I will make several statements that represent our expectations and beliefs concerning future events that may be considered forward looking under federal Securities law.
These statements reflect our views only as of today and should not be relied upon as representing the fifth of abuse.
As of any subsequent date, we disclaim any obligation to update any forward looking statements or outlook. These statements are subject to cyber risks and uncertainties that could cause actual results to differ materially from expectations.
Further discussion of the material risks and other important factors that could affect our financial results. Please refer to our filings with the SEC.
And finally, unless otherwise noted all numbers, except revenue mentioned today are non-GAAP you can find a reconciliation from GAAP to non-GAAP results in today's press release, our results press release and a replay of today's call can be found on doors Investor relations website at investor that bore out dot com.
Now I'll turn the call over to Eugene.
Thank you and thank you everyone for joining us welcome to <unk> third quarter fiscal 2023 earnings call.
Q3, with yet another quarter, where we delivered on our guidance. We posted Q3 total revenue at the high end of our outlook and we exceeded guidance for subscription revenue and non-GAAP operating income.
That being said the world certainly has changed in the last 90 days.
Given the macro level of uncertainty we are celebrating our focus on profitability and our committee should deliver a non-GAAP operating margin of at least 6% for fiscal year 2024.
What this means is today, we announced the difficult decision to reduce our workforce by 11%.
We've been thoughtful.
And how we've approached it making sure that we preserve quota capacity to continue to invest in innovation.
As a founder and CEO of the company I have not taken this decision lightly.
It was the right thing to do for our customers.
Shareholders.
Now we're doing everything we can as a company to help with the transition for those affected and I want to personally. Thank these ceos for all that they've done for the company over the years.
Now, let me take a few moments to add some more color on what we're seeing out there in the market.
I'm talking to customers of course is a key part of my role in.
In the last 90 days I believe I spoke to choose more customers across more geographies than at any time prior in.
Here's what I would say.
First digital customer experiences and subscription business models continue to be a priority.
With the CIO of a $9 billion information services company and he said that any project that streamlines the customer experience is still being funded.
Companies continue to see subscriptions.
The future and we see this in our metrics for example, our total pipeline continues to grow year over year.
This is not a surprise.
These companies that have well established subscriber relationships are going to continue to outperform those that do not this is consistent with our recently released subscription economy Index F E.
Snapshot, which found that even as the world faces economic uncertainty subscription businesses and the Sci were resilient in the first half of 2022 with higher revenue growth compared to businesses in the S&P 500.
These recurring revenue company increased customer acquisition and revenue growth during the first half of the year and subscription cancellations continued to be lower than pre pandemic levels.
Just a few weeks ago, we had the C level executives from over 30 companies had a two day off site, including the top publishing brands one of the biggest video streaming services one of the biggest auto manufacturers one of the largest SaaS companies multibillion dollar technology companies and the <unk>.
We had an incredible response to our vision for how Zephyr. The technology, we acquired this past quarter, but help them deepen subscriber engagement, we put the right offer.
In front of the right subscriber at the right time.
Now all that being said this is absolutely <unk>.
If in the world than just 90 days ago.
The level of uncertainty that companies are facing has risen significantly and this is certainly affecting parts of our business.
Sales cycles are being extended in certain cases due to increased scrutiny on new software purchases in other cases, some companies are simply putting larger scale transformation projects on hold as they wait to get a better picture of what resources They will have.
And our installed base some of our customers are finding it difficult to make longer term predictions about their own business, which may impact the level of volume commitments that they've historically made to our platform.
Second we are not seeing these trends impact all industries equally.
For example, we continue to see good traction in the media industry.
<unk> revenue is on the decline and it's driving these companies to double down on their subscription business.
Last quarter, we talked about how the New York Times is a Prime example of what the playbook now it looks like to build a modern digital media company on a foundation of a strong subscriber base and this quarter, we added to the list.
A leading publisher with 250 newspapers in 2 million subscribers and they can just order with the goal of tripling their subscriber base in the next three years.
It started with Billy to given the pricing and packaging flexibility they needed to continue their subscriber growth and in Q3. They added revenue to help them automate their revenue recognition process. So they can scale their entire order to revenue process to support the ambitious growth goals.
The media industry is also where we're seeing our acquisition of Zephyr, which we closed in Q3 play a really important role.
We learned a lot in our previous acquisitions and I'm pleased to say that we are on track with our plans for company integration and for deepening the existing integration between our two products <unk>.
It's exciting to see the initial traction we're seeing in the market as the media companies and digital publishers realize how critical it is to deliver a differentiated subscriber experience.
For example news Corp, Australia, one of the Jefferies customers recently announced that their total subscriber base grew 13% year over year with Zephyr being the piece of this success.
As competition for these subscribers continues to grow Zephyr is able to help our customers effectively optimize and personalize the subscriber experience to better drive conversion and revenue.
Another industry that we're seeing is the auto manufacturing industry, where new business models are critical to unlocking growth for the next decade.
This quarter, we are adding another auto manufacturing company to our roster. This is one of the largest Japanese car manufacturers in the world with $75 billion in annual revenue and they chose Zara to enhance what they call. The driver experience. They are launching new in car <unk>.
Services, and helping to make Billy effortless for offerings like parking.
Roadside assistance maintenance insurance entertainment and more.
This marks now 30 of the largest 15 auto companies would bet on Dora to take them into the next decade of growth.
And in the broader manufacturing sector.
We're seeing companies like global tire manufacturer Michelin condos or to launch its direct to consumer tire subscription <unk> for both our unique technology and our expertise.
Third.
Our product leadership remains.
Driving force for those companies, who need to launch and scale a recurring revenue business <unk> remains the only solution that can help them manage the entire process from delivering differentiated prescriber experiences to orchestrating the complete quote to revenue process and factors order was recently.
<unk> for the third time as a leader by the IDC market scale.
Testament to our leadership.
IDC noted and I quote.
<unk> has a comprehensive enterprise grade subscription and usage revenue management solution to intelligently automate the quote to revenue process.
Hello.
Good example, when it came to play from the quarter is <unk> <unk>.
<unk> is one of Canada's largest energy solutions company, they provide water heaters furnaces air conditioners and related services to more than one four.
For many customers when it came time to replace their billing system <unk>.
They evaluated both traditional ERP providers and SaaS solutions and it became clear that only <unk> can provide a complete and agile ordered revenue solution. The <unk> platform will not only replace the existing billing system that will enable new capabilities and a stronger customer relationship for their subscription products rental.
And maintenance plans.
Finally in this environment. We are fortunate to also have a strong value proposition around reducing costs and accelerating cash.
We have a broad product portfolio and one that delivers a high level of automation across the entire quote to revenue process. This is enabled us to shift a lot of our messaging with products like <unk>, where revenue that helps companies take cost out of their business through automation, whether it's head count costs or audit fees.
We'll collect that helps companies increase collections at a time when that matters more than ever.
Some examples include <unk>, a leader in smart home solutions, and our long time durability customer selected us more revenue to automate their revenue recognition processes moving entire order to revenue process in $161 billion in revenues will be automated <unk> monetization platform.
Or get hub, the leading integrated software development platform sign up with resort collapsed to help them optimize electronic payment authorization and recovery rates.
Lastly, a multibillion dollar subscription streaming service, where in one quarter resort collect half recover $4 $3 million in otherwise lost payments all flowing directly to their bottom line.
So to net all of this out our long term vision and opportunity remains intact. We continue to see strong interest in Georgia products and we remain confident in our long term opportunity even with the current headwinds.
The uncertainty in the macro environment, we are accelerating our path to profitability and committing to delivering at least 6% non-GAAP operating margin next fiscal year.
The approach, we're taking and making this change is built on our conviction of our long term opportunity, thereby preserving our quota capacity and our ability to continue to invest in innovation.
The best we have placed on growth initiatives over the last two to three years gives us a great roadmap where to find the right growth opportunities while at the same time, allowing us to expand our margins.
Today is a difficult day for <unk> as we say goodbye to many of our fellow Ceos.
But we remain unwavering in our commitment to our customers and our vision of the world as described.
Now I'll turn the call over to Todd to review, our financials and outlook.
Todd.
Thank you, Tim and thanks, everyone for joining us today.
The economic environment has clearly changed over the past 90 days despite.
Despite the backdrop and FX impact I'm pleased that we reached the high end of our guidance for total revenue and exceeded guidance for subscription revenue and non-GAAP operating income as.
As many other software companies have reported we are also experiencing pressure from the current economic trends during.
During Q3, we encountered some elongated sales cycles and some deals requiring additional levels of approval.
I speak with customers engagement and demand for our solutions continues to be high in fact top of funnel generation has grown by double digits. As a result, we are directing our sales efforts in the areas. We saw the most success over the past couple of years, we are directing resources towards our alliance partners versus <unk>.
Terminal demand generation.
Similarly, we are focused on areas to help our customers reduce costs as they navigate the current environment.
As we announced earlier, we made the difficult decision to reduce our workforce by 11% to align our cost structure with the expected near term growth profile and improve operating margins.
This will result in a significant improvement to our customer acquisition cost that will drop to the bottom line.
Now, let me give you some more color on our quarterly performance.
Subscription revenue was $86 6 million growing 20% year over year in constant currency and 17% as reported exceeding the high end of our guidance, we experienced FX headwinds during the quarter based on the strength of the U S dollar.
Professional services revenue was $14 5 million.
A 6% year over year professional services represented 14% of our total revenue.
In the future, we expect professional services revenue will be around 13% to 14% of total revenue.
This will result in a stronger overall blended gross margin.
Total revenue ended at the high end of our guide at $101 $1 million up 17% in constant currency and 13% as reported year over year.
Over a third of our total revenue is international which created FX headwinds of approximately $3 million this quarter.
non-GAAP subscription gross margin was 79% a decline of approximately 90 basis points year over year.
This was driven by investment in our infrastructure to scale.
non-GAAP professional services gross margin was negative 1% in line with our goal to run services at or near breakeven.
Our non-GAAP blended gross margin saw an improvement of 157 basis points year over year, ending the quarter at 67%.
This illustrates the incremental leverage we have experienced in our model as we benefit from working with our partner channel.
non-GAAP operating income was <unk> $6 million.
Compared with an operating loss of $1 $2 million in the prior year.
This was driven by top line growth.
And disciplined investment in the business.
This resulted in a non-GAAP operating margin of <unk>, 6%, a 198 basis point improvement over last year.
Our fully diluted share count at the end of the quarter was approximately 163 4 million shares using both the treasury stock and as if converted method.
Now, let me walk you through some of the key metrics for the quarter.
In Q3, our dollar based retention rate or <unk> was 109%, which included one point of FX headwind. The 109% DVR was two points reduction sequentially and a one point reduction year over year while.
While the current buying trends had an impact on DVR, our retention rates continue in line with historic levels.
At the end of Q3, we had 770 customers that spend at or above $100000 in average contract value, including acquired Zephyr customers, an increase of 25% sequentially.
In Q3, the $100000 cohort continue to represent 95% of our business.
Given this cohort has grown from the time of our IPO to become the vast majority of our business. This metric is less indicative of overall execution. As a result, we plan to provide investors with new customer metrics at the beginning of next fiscal year.
Regarding our customer penetration, we continue to see success from our move up market strategy, and our land and expand strategy.
This quarter, we closed six deals with ACB of $500000 or more including two deals over $1 million.
Turning to building transaction volume our systems process $22 billion of volume in the third quarter, representing 17% growth in constant currency and 15% growth as reported year over year.
As we've noted before process billing transaction volume is not indicative of our revenue growth because customer gains efficiencies as they scale.
Moreover, given the success of our multi product portfolio. This metric alone is less correlated to revenue growth. We have two other products <unk> revenue, <unk>, which generated significant volume growth year over year.
All of which are not reflected in the billing transaction volume metrics.
It is our intention to revisit our metrics and provide you with additional visibility into our full suite of products in fiscal 'twenty four.
Now looking at IRR and free cash flow.
At the end of Q3.
<unk> was $357 million and grew 19% as reported with about one point of headwind due to FX.
Free cash flow was negative $7 2 million for the quarter as a reminder, free cash flow may fluctuate on a quarterly basis due to the timing of cash collections and seasonality.
We believe it's best to assess our cash flow performance over a longer term.
Capex for the quarter was $2 4 million.
Turning to the balance sheet, we ended the quarter with $401 million in cash and cash equivalents at <unk>.
Actual decrease of $48 million, primarily driven due to the acquisition of Zephyr.
Now, let's turn to our financial outlook.
As we shared earlier, we are reducing our workforce by 11%. This will result in a nonrecurring expense of approximately $9 $5 million of.
Of which $3 7 million was incurred in Q3 with a balance in Q4. These nonrecurring expenses for severance healthcare and transition assess assistance have been excluded from our non-GAAP presentation.
While the workforce reduction is distributed across the entire company. The biggest impact is in the go to market organization.
These changes will improve our sales team by streamlining our organization, while preserving quota carrying capacity as Keene mentioned, we'll continue investing in R&D to deliver our multi product roadmap and customer success.
Looking ahead, we anticipate the annualized go forward savings from this action will be approximately $29 million.
Turning to our Q4 outlook are top of the funnel remains as strong as ever but as we saw in Q3 customers are cautious about their spending leading to longer deal cycles. We currently don't expect this behavior to change in Q4 or next fiscal year. So we're being prudent on our outlook.
For Q4, we currently expect subscription revenue of 87, 5% to $88 5 million.
Representing a year over year growth of 14% at the midpoint.
Professional services revenue of $12 million to $13 million total revenue of 99, 5% to $101 $5 million representing year over year growth of 11% at the midpoint.
As a reminder, Q4 has fewer billing days impacting services revenue and margin.
This will also be our first full quarter absorbing zephyr expenses.
non-GAAP operating income of breakeven to $1 million and non-GAAP net loss per share of six to seven per share assuming a weighted average shares outstanding of $134 $4 million.
This includes a $4 million tax impact related to Zephyr, which will also impact free cash flow.
For the full year, we are updating our outlook. We now expect subscription revenue of $336 5 million to $337 5 million representing year over year growth of 17% at the midpoint.
Professional services revenue of $56 million to $57 million total revenue at 392, five to $394 5 million representing.
Representing a year over year growth of 14% at the midpoint.
non-GAAP operating income of breakeven to $1 million and a non-GAAP net loss per share of 15 to 16.
Assuming weighted shares outstanding of approximately $131 5 million.
Next let me review, our cash flow outlook for the remainder of the year.
Our prior year guidance for free cash flow for fiscal 'twenty, three with negative <unk> 13 to negative $16 million as we noted last quarter. It did not include the impact of acquisition related expenses associated with this effort transaction of approximately $4 million.
In addition, we expect to incur a $4 million tax expense related to the movement of that for IP. We will also incur nonrecurring expenses associated with the workforce reduction just announced the remainder of the free cash flow adjustment is due to the impact of lower billings.
Billings given extended deal cycles as a result of these factors, we now expect free cash flow for the year to be between negative $33, five and negative $36 $5 million.
For fiscal 'twenty, three we now expect a growth of 15% and dollar based retention rate of 107%.
While we will provide detailed fiscal 2024 guidance next quarter, Here's how we're thinking about next year.
For the top line, we want to take a prudent approach assuming the recent trends that we've experienced will continue into next year. The bottom end of the range assumes conditions worsen as such we're de risking our model for fiscal 2024, we expect subscription revenue growth between 11 and 14%.
As noted earlier, we expect professional services revenue will be around 13% to 14% of total revenue going forward.
From a bottomline perspective, regardless of the backdrop, we are committed to generating a non-GAAP operating margin of at least 6% next year.
To summarize while there is uncertainty in the current environment. We believe Zara is well positioned to offer a long term sustainable growth.
Top decision, we announced today illustrates our commitment to Bottomline expansion as we grow the top line.
The subscription economy has changed the way companies can serve their customers billing revenue and collect are mission critical.
<unk> solutions that cannot be easily replaced and they offered improved efficiencies. We believe this is an area of customers will continue to invest in.
With that teen Robbie and I will take your questions and I'll turn it over to the operator.
Thank you.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question today comes from the line of Joshua Reilly with need him.
Your line is now open.
Alright, well, thanks for taking my questions.
Maybe we'll start off here on the announced layoffs.
Maybe just some more color here how are you thinking about the mix of quota bearing heads do you expect to retain following the layoffs, maybe can you give us a sense either on a percent or absolute number and second do you need to have higher sales productivity under the new assumptions around profitability for next year.
Hey, Josh This is Todd and I will go ahead and take that.
So youre right.
We did focus a lot of the reductions in the go to market activity one of the things that I feel very good about is the fact that we are able to retain the vast majority of our quota carrying capacity in fact, we only lost a handful of quota carriers and for the most part those were and territories that have not been productive over in the law.
<unk>.
Several quarters, and we didn't see them being productive going forward. What we see is we're going to be able to get much more efficient from a standpoint of eliminating overlay activities simplifying the business and then also utilizing our Si partners to help us in general and demand generation. So we feel pretty good about.
That overall I would expect the quota levels to remain relatively consistent as we move forward and we've got more than enough capacity to hit the guidance that we shared with you earlier.
Got it that's Super helpful. And then you made a comment that.
Youre going to focus more on needs from alliance partners versus direct qualified leads what are the differences if any in the customer profile that youre getting from the two sources, then and what kind of the thought process there.
Yes, so what we have seen Josh over maybe the last six plus quarters as those leads that come in are better qualified they tend to be larger and they closed quicker with a faster conversion rate. So from our perspective is we took a look at where leads were coming from and again, we've been really thoughtful about this.
This hasnt been a knee jerk reaction it was as we've been studying the business taking a look at how do we improve our go to market. We went ahead and said all right. How can we improve that top of funnel pipeline and conversion and Thats, where we came to the overall.
Conclusion that we would be best.
Generating those ways to continue driving them more from the Si partners and internally generating them.
So all I can add on that as well.
<unk> is a very solid pipeline and they also implemented.
I look at some of the over 500 K deals that we had two of our largest funds where our guidance legacy incumbent Arlp's. Both of those also included size as an example, and then in Q3 or in the ISI partners.
And then just participated in over three quarters of new business deals and the size of the deals as Todd said, a nearly doubled year over year through our Si partners.
And over two thirds of our customer go lives in Q3 involve the system integration partner.
And also we can see where there is a prime deal where a partner actually leaves. The deal are those grew 30% year over year. So as you can see we are getting great momentum with our Si partners.
Got it best of luck going forward thank guys.
Thanks, Josh.
Your next question comes from the line of Chad Bennett with Craig Hallum. Your line is now open.
Great. Thanks for taking my questions. So just digging in a little bit on the new net expansion and <unk>.
Guide for fiscal year 'twenty three of $107 15.
Just.
I appreciate kind of the elongation of sales cycles.
And customers being a little reticent to bake in volume growth, but.
I guess did we.
If I look at are our billings or what quarter did we actually experienced that this quarter or do you anticipate.
Significant slowdown in.
In the fourth quarter here and then.
I guess the other question would be.
I seem to recall a couple of years ago when we.
It's been a refocus and restructured the sales force.
That we were going to from a go to market standpoint, or a volume standpoint, we're going to be significantly more conservative in kind of upfront volumes right and we're actually going to start to see a tailwind.
From May.
Maybe deals that were structured maybe.
Maybe not properly before that that are that are renewing now or had been renewing recently so is the volume.
Volume growth really changed that dramatically from a quarter ago. When you were pretty confident in 112 plus.
Hey, Chad Thanks, a lot for the question and things are absolutely change pretty significantly since we did talk.
90 days ago from a standpoint of taking a look at.
What we saw during the quarter, we absolutely did see our installed based customers become much more cautious as they were looking at volumes that are still growing. However, we saw payable having a real hesitancy to compete or excuse me to go.
Go ahead and commit to increased volumes for next year that was certainly an impact to what we saw in the quarter slowing down. We also saw several instances where customers either put projects on hold or had pushed out decisions on the upsell. So I think the good news on the DVR or is that.
Our our retention rates remained at their high levels matter of fact, there historically, where they've been we continue to improve from where we were year over year, but from a standpoint of upsells, including volumes customers got much more cautious and it's our anticipation that they will continue that not only through Q4, but as we look.
Into next year.
And from an upfront perspective, I think I've hit that as we continue.
Size of deals appropriately upfront I, just think were seeing customers being much more cautious on.
Making growth commitments and as they bring forward renewals earlier.
Okay, and then can you can you just.
Talk about how the size of the channel performed in the quarter relative to kind of your year.
The updated kind of NRI.
And <unk>.
And if they are in fact performing relative to expectations and all of the shortfall is direct sales.
I don't know that I would call it that either our direct or channel source pipeline did materialize and in fact, the top of the pipe has been healthier as ever we entered the quarter very strong we're entering this quarter again very strong, but again, we are seeing cost customer.
<unk> be very cautious before they make decisions.
We are seeing in some cases, where people are taking things through multiple level of approvals and theyre, taking things for longer periods of time, but that being said, we're also seeing areas, where we did very well during the quarter. The first example that I would maybe there may be companies that have an extension at substantial need to shift their businesses.
Towards subscription Gannett was a very good example in the quarter.
There is a company that is certainly pivoting to be more reliant on subscription versus advertising and youre seeing they made a seven figure commitment to this our billing platform youre seeing one of the largest Japanese auto manufacturers committing to this or a billing platform, making 13 out of 15 in the auto.
Factors now committed Youre also seeing areas like Vivek were on revenue automation, where it can help customers be more efficient on how they manage their business, but that being said, we're still hit as many other companies are with the macro headwinds of people being cautious on their spending Tobey.
This team is just jump in I don't want you to think that we have two distinct channels direct and their size and their independence is not exactly how it works we have a set of target accounts and I would say our bet on large companies.
Is really paying off it gives us the stability that we need in our business. It gives us the growth potential.
What youre seeing given the macro uncertainty.
Just.
It depends right.
Media companies are moving forward the tech companies might be a little bit slower.
But.
In terms of direct versus that size. This set of customers, we're still reaching out to them direct with every one of them practically speaking has one or more system integrators. They view as partners that theyre going to so it's more of a co selling environment.
So going back to when Todd says, we have learned from this and we can be more efficient right, we're able to balance our resources between.
Our STR organization and our Si organization in terms of our targeted account selling.
Leverage the fact that our partners are already in the accounts right as a means to drive.
<unk> pipeline.
Got it thanks.
Your next question comes from the line of Adam Hotchkiss with Goldman Sachs. Your line is now open.
Good afternoon, and thanks very much for the questions you talked about customer cautiousness on one hand, but on the other hand talked about the pipeline remains really strong.
Are you seeing that spending cautiousness being mirrored by bid.
This model transformation cautiousness towards subscription based models are you continuing to hear our customers seeing momentum there.
Yes, I would say.
Interesting things, we're seeing almost a bifurcation in the business really the bifurcation of the deal the bifurcation of the pipeline.
And so you can see that really bye bye bye.
By industry, but really by how important is to the company.
So the media sector continues to buy the manufacturing sector is seeing we invested all this effort and Iot, we see vast pools of new revenue streams that we can go tap after right and in some of these projects may even be smaller we're also seeing.
We're pretty broad product portfolio. So the parts of our product, where we were able to land a little bit quicker, including the Zephyr acquisition that we did or where the value proposition has a clear cost savings benefit a lot of times when our revenue product goes in.
There is always an audit fees that are received as an example, right because once you automate.
A lot of the revenue recognition youre more resilient to mistakes and you have a less of a need to do.
On every single transaction.
So so those parts of our pipeline are continuing.
The parts of our pipeline where.
To simplify down it's a large investment now over a long period of time, where the benefit doesn't accrue till 12 months out those are going to be put on hold a little more.
Likely to be put on hold we still have a few of those deals that are coming through because there is so important.
But because.
These companies are saying look I don't know where the economy is going to be in six months right is the fed going to continue to raise interest rates in my view to see recession or not and any clarity of that picture before I'm able to make a large investment like this rig directionally speaking is to sell something we want to do right, we still need to get to a target percent of.
And our business model in 235 years, but just the uncertainty that we're seeing.
In terms of where the inflation, you're going to be whereas employment is going to be whereas the peg and ago right is causing them to say look give us another 90 days before we're able to do.
To decide and so what <unk> done is baked that into saying look what if this uncertainty continues on concerning the signs of that and let's make sure. We have a we have a prudent guide yes, I think just maybe to closeout there.
Adam as I don't think its customers are being cautious are jumping into subscription business. So you saw that with <unk> you saw that would be automobile manufacturers as they are.
We're saying hey, our businesses are shifting and we want to be able to offer this but there are some places where it's like all I need to make this transformation, where youre seeing those decisions take longer and we've taken that into account for the balance of this year and next year.
Got it got it all Super helpful and so when you think about that 11% to 14% for next year is it fair to say the primary piece of the sort of slower growth relative to being something like north of 20% would be specifically around sort of that net expansion rate and customer cautiousness, rather than a slowdown in the new pipeline.
Fully understanding that youre, indicating that there is some slow down there because of the extending deal cycles.
Yes, I think what I would say is and I think youre asking about how do we get to the 11% and when do I really thought about that just derisked.
The different scenarios, what we said is let's assume that what we're seeing in the second half not only that continue through next year, but that also gets a bit worse.
And that's how we're looking at it we certainly think that could hit us both on transformations that people are doing and again, our existing customers being very cautious on pre committed for incremental volume or taking on additional products from us, but we do expect the customers. We have there great enterprise customers. They are a growing business we.
There will be a growing business that they will take on some of those but again wanting to be really cautious on what we're seeing.
One silver lining all this when you in terms of the customer base and so I don't know that I would go so far to say this is all customer base not new logos I think it's a balance because if you look at the customer base, we do have a very very sticky products.
And just like nobody is going to want to take on.
People are slow to take on big projects, they're not going to do is they are certainly not going to do a big project to replace an existing mission critical system and so we feel really good about the stability and resiliency of our customer base. The question really is how much is volume going to grow what is your appetite for new innovations.
We think the appetite certainly there.
As long as there is uncertainty in the economy I think it's we knew.
To be prudent and we're going to adjust our plans around that.
Got it thanks, Tim Thanks, Todd.
Your next question comes from the line of Andrew.
I guess, Barry with Dan Burke Your line is now open.
Okay.
Thanks.
For taking the questions I had one specifically in terms of trying to drill down a little more in the in the end markets and specifically the geographies would you say the weakness that you are seeing is broad based awards you call out any geographies in particular as being worse than another and then similarly I need to make sure you're seeing good traction in media, but is there any.
Kind of end market, specifically that was bad as attack beyond <unk> is there something else.
And how would you compare that to what happened during COVID-19.
Let me add let me jump in on the geography side.
The overall as I say the pipeline continues to grow.
And the continued customer interest.
Definitely had some softness in demand due to the general macro and then we saw some softening in arm in the second half as well, but bottom line et cetera.
We are seeing impact from macro.
Very strong interest in both the products and also as we said the growth in the pipeline.
I think the other thing thats really important manner to keep.
Keep in mind is when we're seeing things take longer push we're not seeing a change their competitive profile. We're not seeing those deals are being lost or just saying, it's taking customers longer to make a decision.
I'd say this is also very different in Covid I think the big thing is.
I don't know March or April we knew what was going on but in June July it was pretty clear that.
It was going to be.
V shaped recovery, if you will right here the uncertainty is going to continue.
And I'm no economist, but it certainly feels like we have to predict for a situation where the economic uncertainty.
Well, we view the team inflation in the U S.
It's going to happen with energy in Europe , maybe those questions may not be resolved or for a few quarters. The other thing I'd add about the Covid comment when we went into Covid. I think there was also two other things that were a bit of overhang. We had customers that maybe we haven't targeted correctly and we saw a fair number of those churn they probably werent good fits with us.
And then we'd also oversold the volume and now what you're seeing is we've got a really tight correlation between the core <unk>.
Committed volume that we have and what customers are using a very different company. So we don't expect to see anywhere.
And I wanted to point that out that we're seeing our retention levels now they've improved they consider you to improve.
Year over year. So we don't have the challenges that we had in retention. When you went back a couple of years ago. During Covid I think thats a real important differentiation.
Thanks for that and then if I may add a follow up to Adam's question earlier on the 2020 for outlook.
I guess bill.
Number one why did why provided now before the end of probably what is seasonally a stronger quarter.
Was it a question of trying to provide a floor to people's assumptions for next year and then.
Secondly, if we could talk about the high end of the guidance of 14%.
What does that assume relative to the bear case is kind of a continuation of current conditions or something better than that and then in terms of the margin expansion comment is that is it.
If you get above that low end of the range could we see those margins be above the 6%.
Yes, so thanks, a lot Andrew So maybe let me take you through talked a little bit about how we got to the low case really sat there and ran the different scenarios from a standpoint of.
What happens if we continue with what we're seeing in the second half of this year not only has that continued throughout the fall of next year, but it actually gets a little bit worse on the high end, what we would see is that we.
We continue to see the first half being a bit of a challenge and things getting <unk>.
Slightly improving as we move out through the second part of next year I don't want to get over my skis and get overly optimistic on what next year looks like I'm not an economist, but we certainly have a quota carrying capacity in place that when things change, we will be able to move very quickly.
We talked about having a really tough decision to make on realigning what our workforce look like we went ahead and we took those actions and what we said is at a minimum we will deliver.
6% non-GAAP operating profit next year, if it continues to be a tight ear and it doesn't make sense to invest in topline growth I'll put more dollars towards the bottom line and Youre absolutely right. We can see the bottom line get better. If we think we can get a good return and accelerate that growth to the 14% or higher will certainly direct those dollars there.
But that's how I'm thinking about it at this time and we felt like our business is relatively resilient. We certainly have good visibility with our Si partners on what our pipeline looks like and the different scenarios. We could run we felt like it would be a good thing to give people a point of view on how we're thinking about the business and we're more completely update you when.
We do the call in 90 days.
Thanks, Dan.
Your next question comes from the line of Brent Thill with Jefferies. Your line is now open.
Thank you.
Thank you Tina Todd and Ravi for taking my questions. This is love soda on for Brent Thill.
Maybe just wanted to start out with.
Again going back to that.
<unk> B net retention.
Duration that you've seen I guess.
Could you just remind us how much of that expansion is driven by volumes and just give us a sense of the pricing mix.
Yes, as we've talked about love over the last several quarters I would say, it's relatively evenly based between.
Three things it's.
Making sure we continue to improve the absolute <unk>.
Tension rate of our customers. The next is upsells of products and a third is volume and so you know.
It's relatively balanced quarter over quarter, we were probably a little bit less on the on the volume this quarter as customers were a bit more cautious on what they were committed.
From a full year basis to remember.
We continue to have FX headwinds right. So so theres, some theres going to be.
A headwind baked into that number.
When a non U S dollar deal renews.
At the base level Youre, taking a loss rate there right and that's just the way the currencies work.
Got it.
I wanted to ask one on Todd you mentioned that.
The top of the funnel is still pretty strong I guess, what is driving the strength.
And I'm guessing the close rates are.
Moderated quite a bit.
Any color as to like these qualified leads or any any color into what drives the strength from the top of the funnel.
So I'll start maybe with that and let Ravi finish it off.
Anything that we've got in the funnel has actually been qualified so when we talk about funnel, it's not an opportunity that has not been qualified and accepted by our sales teams, but what we're seeing very very strong as we've talked about certain businesses that have an existential requirement for a subscription business. So we talked about what we're seeing in manufacturing we've.
About what we've seen in media the other areas. We have several of our solutions I think both collect and revenue do a really good job of helping companies in times like this improving their overall collection rates automating their revenue recognition being able to save time and money for companies. So those are things that I've seen that I've certainly been helpful in driving.
The top of the pipeline, but maybe I'll, let robbie.
Kind of finished that off for you.
We continue to debate and data on a bidding perspective.
And you see that.
So with the <unk>.
So as Tim mentioned, the IDC marketplace reports, where we are a leader in those.
The tracks also has the best in cost and leader in the space and so on the naturalness of people. They will the paper will look at.
I think the other point to absorb that as with the growing maturity of our multi products around revenue and collects its giving us more places to guidance due to land and then to be able to do what we've done very successfully which is then expand across the entirety of not now just the order to cash but also.
The subscriber experience space.
I think this is Gino maybe I'll just with capital that's what we're trying to communicate is the interest levels and the need for companies to move to subscriptions remains absolutely there.
Question is really.
Some industries.
Under pressure and going to take a little pause where they move the projects in our other industries like the media industry moving forward fast I mean, the manufacturing industry I just came back from Berlin at.
That box World is connected world, It's all about Iot.
And.
And I.
I don't sense, a slowdown there, but a lot of these projects are more innovation projects that to create new services.
They're monetizing.
Got it.
Last one if I may for Todd.
I know you provided the guidance for fiscal 'twenty four.
And with the commentary around de risking it.
I guess.
Fulfilling approved obviously that seems to be challenge the challenge this quarter.
I guess, what gives you confidence that 11% is kind of like the worst case scenario.
Thank you.
So I think there's a couple of things give us some confidence one is the pipeline continues to be an all time high we continue to see the size and invest with us pretty significantly whether it's the work we're doing with Deloitte as an example, where they're actually adding people to help grow their business with.
Some of the <unk> say that they are seeing zora as the fastest growing emerging practice that they have so we're seeing a lot of activity around customers doing that we also are seeing are full multi product solution really kind of come to bear here over the last couple of quarters. So not only can we lead with Billy.
But our revenue collected now zephyr are products that not only can we land with very quickly, but again they are absolutely existential and helping many companies achieved our near term goals and achieve some of the direct and some of the growth objectives that they have.
We have a lot of levers.
Our disposal right.
<unk>.
We've talked about this many times before we have a whole land and expand strategy.
We do have the ability to lean in with specific modules, so rather than going through a big transformation deal. We can land with we can evenly with a basic version of revenue recognition, we can only with one of the modules.
There's a lot of companies out there that just need help traveling standards selling prices. This <unk> acquisition is really really interesting grade their sales cycles are 90 days or less and they're able to get live and this is why when we showed the product to our non media customers.
They're really excited too so we do have a lot of levers at our disposal, but again, given the broader level of uncertainty.
We took the actions that we did.
We're committed to profitability.
And we're making sure that.
We have a good guide and remember we've got a 1000 plus total customers. We've got a lot of visibility as to what's going on into their businesses and we can take a look and as we started looking at the different scenarios. We got really comfortable that we could get ourselves we could derisk ourselves.
Really good that 11%.
It'd be a floor, even if the macro environment worsened and the last thing that I'll say is we've also got really focused as we've been committed for several quarters now on the profit line, but we are absolutely committed to at a minimum of 6% and if we don't see things picking up we've got an ability to put more dollars to the bottomline.
For next year.
Got it thank you.
This concludes the conference call. Thank you for your participation have a nice day.
Okay.
Yeah.
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Yes.
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Okay.