Q2 2024 Zuora Inc Earnings Call
Good afternoon, and welcome to Zoro second quarter of fiscal 2024 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. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question again press the star one with.
That I would like to turn the call over to Carolyn bass Investor relations for introductory remarks.
Please go ahead.
Thank you good afternoon, and welcome to <unk> second quarter fiscal 'twenty 'twenty four earnings conference call.
On the call we have teams, though yours, founder and Chief Executive Officer, and Todd Mcelhatton Torres Chief Financial Officer, Robbie trauma, our President and Chief revenue officer will be joining us for the Q&A session.
During today's call, we will make statements that represent our expectations and beliefs concerning future events that may be considered forward looking under federal securities laws.
These statements reflect our views as of today, only and should not be relied upon as representative of our views as of any subsequent date.
We disclaim any obligation to update any forward looking statements or outlook.
These statements are subject to several risks and uncertainties that could cause actual results to differ materially from expectations.
For 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 for both the current and the prior year's period and today's press release our.
Our press release and a replay of today's call can be found on <unk> Investor Relations website at Investor <unk> Dora Dot com.
Now I'll turn the call over to Eugene.
Thank you Carolyn and thank you everyone for joining us today and welcome welcome to <unk> second quarter fiscal 2024 earnings call.
I'd like to start off by congratulating, our head of Investor Relations.
On a walk on the birth of her second son, and thank you Caroline for stepping in Wild Wanda is out on parental leave.
Although I suspect that she might be listening in right now.
Q2, Q2 was another solid quarter, where we delivered on our guidance progressing our topline and coming in ahead of our bottom line.
In the second quarter subscription revenue was $95.5 million.
Growing 16% in constant currency and 14% as reported.
Our our grew 14% as reported.
And we came in at 9% non-GAAP operating margin for the quarter.
This is up from 6% last quarter and up 900 basis points from Q2 of last year.
We are now halfway through our fiscal 'twenty four and it's a good time to recap our larger mission and strategy and the progress we've made towards building a durable profitable business.
The core thesis of the company.
To be the leading beneficiary of a broad long term secular shift in business models.
Our mission is to offer differentiated hard to replicate technology that helps companies thrive with these new business models.
Our technology goes into the guts of our company's operations. When we go in were very sticky.
And so our strategy is to sign up the biggest and best companies in the world turned them into customers for life and tie our growth to the growth of their recurring revenue business in two ways first with a consumption based pricing model and second through a consistent pace of organic and inorganic.
Innovations that we can sell them.
When I look at the World I see a durable business model that is riding a wave that will last decades not years.
So what do we see in Q2, along this journey.
I'd say the key message for Q2 is steady as she goes.
As we go through this period of higher scrutiny around technology spend.
We are seeing the companies continue to embrace recurring revenue models that the adjustments we need to focus on smaller faster lands continues to pay dividends.
So we continue to demonstrate the durability of our enterprise segment and finally, our innovation train continues to roll forward and take hold within a customer base that <unk>.
Most companies would be India itself.
Let me go through each point with examples of what we saw in Q2.
On our last earnings call, we said that buyer behavior has settled into a consistent pattern in this extended into Q2.
There continues to be good demand for what we do.
Why.
Because modern businesses know that they must center their business around their customers.
Laura.
The business models that makes this possible.
Let me give you some examples of new logos from the quarter.
The dish wireless a subsidiary of dish network and a five G network provider that reaches more than 240 million Americans. They purchase zero revenue in Q2.
Zora has the unparalleled functionality dish needs to automate their revenue recognition as they grow their subscriber base.
Another example.
What are the top five largest companies in Japan, when <unk> in Q2, and we are now helping manage their media SaaS offerings. This company has hundreds of thousands of subscribers who use the service every month to edit archive and share their media files and they selected Zara billing and lower revenue.
Because of our enterprise class capabilities.
The third example is the.
Atlantic a great proof point of the success of our Zephyr acquisition last year, which further strengthen our position in the media and publishing vertical and.
In previous quarters, we've talked about our work with the New York Times and can net in Q2, we were proud to welcome the Atlantic a leading magazine and multi platform publisher with over 925000 subscribers, which signed out with Saar billing and Zephyr together to power their pay.
In billing solutions Zoro will give them new flexibility to experiment and enhance the reader experience, while freeing up engineering resources to innovate.
Again, the technologies, we offer continue to be relevant in this marketplace.
On our last earnings call, we talked about how we displayed a G I.
By adjusting to the macro do targeting smaller faster lands with a single zora product versus starting customers with the full suites in that strategy continue to pay off this quarter as it did in Q1.
This quarter, we closed over 35% more new logos compared to Q2 of last year and our average sales cycles improved by.
By over 30% year over year.
Now, while we have the agility to land smaller faster deals. It's important to remember that we remain committed to the enterprise segment. The premium durable segment in this marketplace. This means that we have runway to expand within our accounts and it also means that we're still seeing big deals as we do.
We still see companies with the right catalysts invest in large transformational projects.
In fact, if you look at our Q2, we closed seven deals with an average contract value at or above $500000, including one at above a million dollars.
These large deals helped us add eight customers sequentially in Q2, with an ACB at or above $250000.
And of course, our system integrator partners also remains important to our ecosystem in.
In fact, the Q2 partner sourced and partner influenced bookings both increased sequentially.
Finally in Q2, our innovation machine.
<unk> to make me proud.
So many of you were able to join US as described live in June either live in New York or virtually online where we made for key product announcements first we announced enhancements to our zora for consumption capabilities. The only solution that provides end to end billing and revenue recognition.
<unk> design for these new consumption billing models that are all the rage and technology companies.
Second we announced the <unk> Command center, which helps admins monitor critical activity managed multiple environments and proactively troubleshoot issues with embedded AI.
Third our news or a warehouse with our B Y O W or bring your own warehouse technology allow customers to power large volumes high speed data analysis directly in Zora using a natural language interface that again is powered by AI.
And finally, we announced Zephyr for all industries.
Allowing all companies in all industries to implement subscriber led growth strategies.
With the demo that people are still talking about.
And we've already started seeing the impact of these innovations in Q2.
For example, Saar for consumption helped us close the high six figure ACB deal with a billion dollar global electronic marketplaces operator.
And as our command center has already rolled out to 'twenty early adopters, who are universally seen this is already making them more productive and they're eager to see it grow.
And finally, we have been busy showing zephyr for all industries to SaaS companies, gaining companies auto companies and more and today I am so excited to be able to say that we've already signed our first non media customer for Zephyr.
In Q2, we expanded our relationship with 24 hour fitness the major fitness center chain, they came to us to tailor their pricing and packaging across their close to 300 locations with zephyrs, New dynamic offers will be helping 24 hour fitness bring memberships and personal training.
Products to market even faster.
All while reducing dependency on their internal resources.
The news doesn't stop there we are taking subscribed the Vince global and we will be making additional announcements at our upcoming October described connect event in London.
All of this incredible work is now being led by our new Chief product and Technology Officer, Pete Hirsch, who joined US from Black line just last month.
His deep experience in technology, he understands financial systems and in fact was already knowledgeable about zoro as one of our customers.
I am confident that Pete is the right leader to lead discharge that you further accelerate our product innovation and I am excited for what's to come under <unk> leadership.
In closing I want to thank our Ceos, who continue to execute and innovate who continue to turn us into a durable profitable business. It will help zora and being named one of Fortune's best workplaces in the Bay area for a second year in a row.
With that I'll turn the call over to Todd to review our financials. Thank.
Thank you Jane and thanks to everyone for joining.
In Q2, we once again executed on our plan of balancing growth and profitability.
During the quarter, we observed the same buying behavior, we saw in Q1.
Our subscription revenue and total revenue were within our Q2 guidance with non-GAAP operating margin exceeding the high end of our range.
For the full year fiscal 'twenty, four we're raising our non-GAAP operating margin and adjusted free cash flow outlook.
In Q2 subscription revenue was $95 5 million growing 16% year over year in constant currency and 14% as reported.
Similar to last quarter, we continue to experience two points from FX headwind based on the strength of the U S dollar.
Professional services revenue was $12 6 million a decrease of 16% year over year and represented 12% of total revenue.
A decline in <unk> revenue as a result of our Si partners, taking more implementation business.
Given the demand for multi year digital transformation deals has declined in the current environment partners have adjusted to take on a broader range of projects, including those we have typically done in house.
Total revenue was $108 million up 11% in constant currency and 9% as reported year over year.
As a reminder, over a third of our total revenue is international which created FX headwinds of approximately $2 million this quarter.
non-GAAP subscription gross margin in Q2 was 81% an improvement of nearly 90 basis points year over year as we continue to see our investments in infrastructure payoff to expand our margin.
non-GAAP professional services gross margin was negative 5% a reduction of nearly 190 basis points year over year. As we stated previously our PS margin may fluctuate based on investments, we make and customers to support near term subscription growth.
Our non-GAAP blended gross margin was 71% an increase of nearly 350 basis points year over year.
The improvement was driven by increased subscription margin.
At a higher mix of subscription revenue.
non-GAAP operating income in Q2 was $9 6 million.
Compared to a non-GAAP operating loss of <unk> 2 million in the prior year.
This resulted in Q2 non-GAAP operating margin of 9% a significant improvement of 900 basis points over last year.
This was driven by top line growth and disciplined investments in the business. We will continue to generate non-GAAP operating income on a quarterly basis going forward.
Our fully diluted share count at the end of the quarter was approximately 171 6 million shares using both the treasury stock and if converted method.
Now, let's dive into some of the key metrics.
Dollar based retention rate or DVR or ended at 107% down one point sequentially and four point reduction year over year.
Not surprisingly customer demand for volume has been impacted due to the macro backdrop.
We continue to have very strong retention rates, we're seeing our customers stay and growing with us given how mission critical our solutions are in.
In fact, Q2 was a third quarter in the past five quarters, where we've seen record high retention rates as a percentage of entering IRR.
At the end of Q2, we had 444 customers that spend at or above $250000 in average contract value, which was up eight sequentially and 37 year over year. This cohort represents over 80% of our business.
This quarter, we closed seven deals with an ACB of $500000 or more and this includes one deal over $1 million.
<unk> with none in Q2 of the prior year.
Now looking at <unk> and free cash flow.
At the end of Q2, <unk> was $384 2 million and grew 14% as reported.
Adjusted free cash flow was positive $4 million in the quarter, a meaningful improvement of $11 $5 million over Q2 of last year.
Adjusted free cash flow as operating cash flow adjusting for capital expenditures acquisition related costs and non ordinary course litigation costs.
As a reminder, adjusted free cash flow fluctuates on a quarterly basis due to the timing of cash collections vendor payments and seasonality.
We believe it's best to assess our cash flow performance on an annual basis.
Total capex for the quarter was $2 2 million.
Turning to the balance sheet, we ended the quarter with $406 $2 million in cash and cash equivalents, a sequential increase of $9 4 million.
Turning to our financial outlook as Tim noted, we're seeing similar buying patterns relative to last quarter and our outlook assumed that these trends will continue for the remainder of the year.
We're also assuming that the trends in our professional service business will continue and we're standing by our partner first strategy to enable our Si partners take on more of the implementation work.
This will impact our PS revenue in the second half.
Starting with our guidance for Q3, we currently expect.
Subscription revenue of 96, five to $97 5 million.
Professional services revenue of 11 $12 million.
Total revenue of 107, five to $109 5 million.
We expect non-GAAP operating income of $10 million to $11 million and non-GAAP net income per share of five to six.
Assuming a weighted shares outstanding of approximately $141 6 million.
For the full year fiscal 2024, we're raising the low end of our subscription revenue and raising our guidance for both non-GAAP operating income and adjusted free cash flow. We now expect subscription revenue of $380 million to $384 million.
Professional services revenue of $48 million to $49 million total.
Revenue of $428 million to $433 million.
non-GAAP operating income of 34% to $36 million.
And non-GAAP net income per share of 'twenty, one to 'twenty three.
Assuming weighted average shares outstanding of approximately $143 million.
For fiscal 'twenty four based on our strong cash flow generation in the first half of the year, we are raising our adjusted free cash flow from $24 million to at least $28 million.
A dramatic improvement from fiscal 2023.
We are also increasing our operating profit objectives for the second quarter in a row. We are now committed to delivering a minimum of 8% non-GAAP operating margin for the year up 200 basis points from the initial guide our fiscal 2024.
Turning to DVR and our growth for.
For the fiscal year, we continue to expect <unk> of 107% to 109%.
A growth of 12% to 15%.
We continue to expect annual share dilution for fiscal 2004 to be under 5% with the midterm target of 4%.
For this purpose dilution is calculated as the number of equity awards granted net of forfeitures during the fiscal year divided by total shares outstanding at the end of the year.
We see demand from long term secular trend of companies finding new business models to monetize.
Looking ahead, we remain focused on balancing growth and profitability.
Based on the current environment, we believe it's prudent to put dollars to the bottom line.
We have the sales capacity to deliver on our outlook for the second half of the year.
And we have the ability to ramp up as needed.
Our solutions are critical for our customers to run their business or multi product portfolio offers customers the necessary agility to monetize and expand their offerings.
We look forward to continuing to innovate and create more opportunities for our customers to grow with us.
With that team Robin I will take your questions and I'll turn it over to the operator.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.
Your first question comes from the line of Adam Hotchkiss.
Your line is open.
Great. Thanks for taking my questions I guess team to start will be great to get some more color on some of the comments you made around improving sales cycle and deal momentum.
What is it that you think is driving some of these improvements and how do you think about when some of that might start to flow through in the form of revenue Reacceleration is this just purely macro or do you think of some of it is driven by the announcements we made in June . Thanks.
Yes, I've also got Ravi here this is gene.
Dump in but I would say.
We talked last quarter really about people have this impression that because we sell an ERP like system that we can only do.
Large deals with large implementations and we wanted to highlight was in Australia architecture allows us to go in with one product not the entire suite.
And so we adjusted at the start of the year to say look given everything we're seeing in last year in Q3 and Q4.
Let's start to direct our sellers to.
To take down smaller faster deals and so we wanted to say look we still have a balance we still see companies come in and say look we have a catalyst in our company that requires us to put a large transformation project in place and so we highlighted some of the larger deals that we did but at the same time.
When we go in we don't have to do that we can just land with billing we could just landing with revenue, we could just staying with zephyr and our ability to.
To tackle the market and this agile way it does allow us to do smaller faster deals and we're seeing the positive impact of that.
Yes.
Great.
Well, we have as the optical market for US we are a mission critical solution.
But at the same time, we can land smaller than the deals and the customers that we wish to the enterprise customers.
And we have a choice right with multi products and what we do so we can land in multiple different ways and then we come once landed then we can expand on.
And that has been working well for us.
And so our goal is to continue to.
222 to sign up these companies and we're not adjusting the companies we're targeting we're still targeting what we see as the best and biggest companies in the world.
We do believe these are fantastic customers or customers for life and so if we can land with smaller deals and continue to execute our expansion strategy, that's going to be all goodness whether.
The macro is slower or if its back up to a faster speed.
Got it.
That's really helpful. Thanks, and then when we think about the product launches from subscribe live and Theres a lot there right with Zephyr data warehouse consumption billing.
I recognize some of this will take some time to play out as you push these product improvements into the marketplace, but how should we as analysts be thinking about.
When we might see the financial catalysts from these things I know you mentioned the one customer from Zephyr that joined outside of the media space, but how are we thinking about that from a financial impact perspective.
Hey, Adam it's Todd So obviously as we release products, we have an expectation that they grow over time. So as these products are just go on <unk> this quarter or in the last quarter, we will see that pick up over time, so feel really good about what happened with Zephyr and 24 hour fitness, there's a good pipeline of other opportunities there we saw.
Like consumption billing drew one of our high six figure deals as last quarter. So feel very good about the prospects there, but on an overall I don't expect it to change outside of our guidance I think this will build and this will certainly lead into next year and provide us the pipeline to continue to grow as we move forward.
Okay really helpful. Thanks, everyone.
Thanks, Adam.
Your next question comes from the line of Joshua Reilly of Needham Your line is open.
Yes, thanks for taking my questions and nice job here on the quarter guys.
Maybe just one on the macro I guess, maybe some more color here would be helpful. What are you hearing from customers on why they are delaying some of these digital transformation projects do you think it's uncertainty around interest rates and where they peak or just general weakness in the tech economy, and our end market and everybody is kind of waiting to see where demand bottoms out and then what are you.
Think ultimately.
We should be watching for as the catalyst.
To see a demand recovery or.
What is there in the market that could change the current dynamic.
Yes, I would say what we're experiencing is on one hand.
I think different.
There is more scrutiny on spend certainly out there.
It depends on industries rates are you seeing the media industry continuing to invest in subscriptions because they know that for their revenue growth is coming from but look overall at a macro generalized level. There is scrutiny on spend but when you look at our specific space companies are still saying look the future is going to be recur.
<unk> revenue the future is going to be monetizing these new digital services. So this is something that we simply have to do.
And so the projects that are in companies that saying look regardless of what's going on the macro that we have to invest in this space now.
So the bigger deals that we're seeing.
With other companies. We can say look you know you want to get started you know it's important to you. If you have downward pressure on spend right now why don't we get started in <unk> and in this part of the portfolio and then you can continue to grow with us overtime.
So I can say.
Customers they continue to expand with us and now the numbers that we called out I mean that 250, K plus cohort grew 17% year on year of 500, K grew 24% year on year. So we continue to see that because it is mission critical to what they do.
And that really just speaks to the general agility that we have and how we how we attack the marketplace.
Got it that's helpful. And then if you look at the change in the operating income guidance you guys.
To continue to find areas of savings there what would you say is.
The biggest piece of savings maybe versus your initial plan for the year end and where do you continue to see a source of operating leverage maybe for the rest of this fiscal year and Youre in your operating expenses. Thanks, guys.
So Josh we're continuing to be Super disciplined on everything that we're spending one of the things that we've said this year was we want to have the ability.
Either.
Market makes sense to go ahead and invest in topline growth feel good about where we are on top line, we're going to be where we said we'd be at the beginning of the year, we've not seen a reacceleration in the market. So we're not adding additional capacity in so thats certainly an area that is helping us. We spent a lot of time in the go to market areas on how do we get more efficient there that will continue to drive it.
<unk> fees.
Saw the Cogs, especially on the subscription side jumped up to 81%. So I feel very good about what's happening there taking a look at how we put engineering resources and in doing that another area, where we're looking at the same thing with G&A. So it's really across the board where you go obviously.
The first area that in our biggest area of spend as we go to market and we are constantly working to get that more efficient and then like I said, we'll continue to evaluate and as it makes sense, we'll continue to get leverage out, but as we continue to grow and more and more of our bookings as we come a larger company those dollars a lot of them go to the up sell bookings just the CAC on that.
And a lot better than when we're investing in new logos and so as we continue to get larger that will also give us more leverage in the operating model.
Okay.
I mean, John you still got it and then one more thing.
We did take this as routine <unk>.
An opportunity to ensure some incredible stuff obviously the utilization.
It's about efficiencies as well as productivity is about being able to do more with the same number of resources. If you look at Taj organization partnering with with the IP organization under under Daisy.
We are using them for our own products to become more efficient and we've taken a number of days on IR side down from from from 13 days or five days flows and Thats. The type of thing that we think we can use our technology for that our customers certainly can have benefit as well.
Got it Super helpful. Thanks, guys.
Your next question comes from the line of Chad Bennett of Craig Hallum. Your line is open.
Great. Thanks for taking my question so just on.
Kind of the progress youre, making on the smaller and faster Lance.
Just in terms of magnitude is there any way to think about kind of where those.
If there's any historical data.
Kind of where our land would be today relative to what you've seen in the past and just kind of the magnitude of the ATV different sir.
Chad I think I had a couple of ways. One is if you take a look we have landed a bit lower on the asps.
Over the last couple of quarters from a standpoint of having more deals and those deals and bringing more new logos on and bringing them a bit lower.
They're not like half the size of what we were doing before but there is still nice six figure deals.
The other thing that I would say about when we're looking at goes if I look at our top five customers.
I want to say four of those five started off right around 100, 150, and now those are now customers running over $5 million a year in IRR. So we certainly have shown we picked the best and the fastest growing companies and I'd say the fastest growing that may mean, their subscription businesses, we have a huge opportunity to expand and so that.
Kind of the filter that we're putting on when we're going after smaller lands is again, making sure they're companies that we can grow with over the long term that's right I mean each of these companies who are signing on we still believe that the lifetime value of that customer.
That we're pursuing is not changed right, but if we can start smaller with them and have confidence that we can grow them up to that point then given the macro situation given the scrutiny on technology spend why not get started with them now.
I appreciate the color and then maybe just on the dollar based net retention.
At 107, I know you reiterated I think the 107 to 109 range just in terms of the level of confidence and visibility that.
107 is kind of the trough here as you look at the pipeline teen or Rob or Todd for that matter, just what gives you confidence confidence that that 107 holes.
Potentially improves over the next couple of quarters here, if you think that.
Sure Chad I'll, maybe take that so two things that impact the DVR. The first is our retention rates and I feel really good about the fact that three of the last five quarters, we've talked about another record from a standpoint of higher rate retention rates. Since we had the highest historical retention rates this quarter.
All time, so feel really good about our ability to pick the right customers and keeping them in a lot of that's been the strategy that we.
Embarked upon three years ago on going after the enterprise.
The second thing that drives that is certainly.
The expand base and one of the things that we've talked about is there is a volume element of that for us and we have certainly seen that as our customers arent growing as fast than what we've seen is there has been a bit of a slowdown from what they're purchasing oddsson additional volume one interesting thing to note. This is the first time in I think in four or five quarters that we actually saw a sequential uptick on the <unk>.
<unk>. The other thing I would say is keep in mind Q2 that was a really tough compare for us from last year. So as I take a look at what the pipeline looks like.
And what we can see with our customer base and what their needs are for growth and the different products that we most recently reduced our excuse me release I am confident that 107 is definitely the bottom end of it and we'll be in that 107 to 109 range as we exit the year as we said at the beginning of the year.
Great. Thanks for the color great job on the quarter guys.
Thanks, Chad.
Thanks.
Your next question comes from the line of Rob Oliver of Baird. Your line is open.
Great. Thanks, guys, good afternoon, and good to be on the call.
One for you and then Todd a follow up for you. So you called out.
Pete Hirsch.
The enthusiasm over is higher I was wondering if you could just talk a little bit about what made him a good fit and what are some of the priorities that you had or he has coming in to the role.
Yeah. So.
Yes, I think.
It's been in the job for I think six to eight weeks right now so I want to give them a little bit of time, but the first thing I would say is we don't have any major changes that we were looking for people to come in and do things were going well the innovation machine was going well.
The adoption of our capabilities.
People are incredibly enthusiastic of and so we're not looking to make any short term changes with Pete brings and really has a deep understanding of financial systems. He is obviously built the point of view of working with our CFO and chief accounting officers in the past four years, where he has been at.
And obviously one of the big areas that easily excited about too is going to be not a surprise here, but AI and so there's a lot of conversation that he is really starting to drive about what is our future around AI. There's a lot of good ideas that we have we've obviously been using AI quite a bit we use it in our payments and collection capability.
To get retry rates rate payment completion rates from somewhere.
Somewhere call it high 80% to 99% or better we announce a lot of AI capabilities with the four product announcements that we had just a month ago around warehouse around is worth man center, but if you step back and say does have a big big opportunity to really transform financial systems and allow our products would be.
Much much more valuable absolutely it's in the area of insights into the area of being able to improve subscriber experiences for our customers' customers and obviously to be much much more efficient in their financial operations. We think AI can have a big capability in all three areas and it's something that piece really driving right now internally.
Great. That's really helpful. I appreciate that and then Todd one for you.
The partners, taking on some of the smaller deals and the impact on the PS revenue.
Makes sense.
Strikes me as a bit of an encouraging sign to I'd be curious to hear your take is this something you expect to kind of revert back I know you said you expect it to continue as long as there's pressure on large digital transformation deals, but is it something you expect to revert back when those do return.
Given that these.
Professional service partners know your complete portfolio.
What does this potentially do in terms of pipeline creation on the backend where you guys have any smaller landscape. Thanks.
Hey, Thanks, a lot Rob So we're absolutely focused on the subscription revenue side of the business that grew 16% in constant currency. This last quarter. We saw the gross margin increased 81% and that's where we make our money.
And the services as ancillary business to US you know that we run that at a breakeven to a slight loss and so the design of our by design. We said, we'd continue to want to bring down the services mix in our business and so might be happening a little bit faster now that's been something we've been talking about now for quite some time, it's something that we are.
We're very comfortable with and we're happy to have our partners take that over and work that we work well with them. It also helps drive additional pipe for us over time, so from my perspective.
We're kind of at the range, where I think we will remain over over the next time it over the next several quarters and we feel good about that because subscriptions being very healthy provides us a great margin and that's where we'll be focused on and so I mean, if I can as well.
Again, we want to win the best companies in the World, Brian and as of our growing subscription business for that long term. We are a partner first and that is our strategy.
So as we are they are adjusting to the current macro and so we're going to continue our commitments to them and theyre doing the same with us and all of US for example, two of our top global asset size.
The people who've been asked answering and that commitment they become partners because of the work that they've done with Zora. So absolutely we will continue that relationship and that strategy and upon the first strategy.
Thank you.
Your next question comes from the line of Andrew de Gasperi of Baron Baird. Your line is open.
Thanks for taking my question.
So I guess first congrats Luanda.
I just wanted to touch on the.
<unk> releases, you've made in June consumption billing in particular I was wondering in terms of the reception you got from customers have you seen a ramped up.
Kind of activity, there, maybe not necessarily deals.
To call out, but have you seen kind of incremental interest since that event.
Oh, absolutely look Robby.
You could tell them I was excited about the capabilities when we launched it in June .
It was something that we have worked closely with our customers. We have this thing called the door Advisory group. The zag at our key customers involved within these ideas are really incubated out of that and on the call I try to highlight some of the successes and so the consumption building capabilities already drove the deal with <unk>.
Just shy of seven digits I think we call it a high six digit deal and that it wouldn't happen without the Saar for consumption capabilities.
Highlighted zephyr right. When we did the acquisition obviously you can see it has a big impact already in our media space with the Atlantic, but the Big Big bet was can we take it outside of media and all the other industries that we have and so announcing a 24 hour fitness and existing customers are saying look we liked is that provision we want the debt provision we needed.
Our provision and they became the first non media customer.
Zephyr that was really really exciting as well as again, we're sitting here in August .
And the subscribed live was in June and so you're seeing that the impact of these innovations are happening fairly quickly.
Thanks for that and then Todd, but sort of a two part question first on the I know you don't normally call. This out but the billings growth was really strong in Q2 and just wondering if there's anything there and then secondly, just as a follow up to Rob's question earlier on the services.
I mean, clearly the numbers are coming off a bit faster than we modeled just wondering in terms of the steady state level that you foresee beyond maybe even this year do we continue to see that number coming down slightly maybe not at this sort of range but.
At a lower level or do you see that at some point, we should we would see that flattening out.
If the macro improves or if there's some kind of other element that we're not a warehouse.
Okay.
No.
On a calculated subscription that subscription billing and we continue to kind of go back to focus people, let's take a look at what is the IRR. That's what we have in the bank that is exactly how we model our business and run it we've talked about for quite some time. There is a lot of movement in the <unk> and the calculated billings, we've got a little bit of FX.
This quarter Thats in it but renewals timely renewals companies, bringing things in and that certainly has an impact and we've had a couple of situations, where we've had some different billing terms and that certainly provide some.
Moving in a back and forth. So really the <unk> is the way to look at it and again, if you look at the subscription targeted subscription billing over a longer period of time, what you see is that pretty much tracks, where the AAR growth is up 14%. This year. So I don't think theres anything that C&I. It ebbs and flows and that's why we guide to the IRR from a standpoint of where we are on the.
Services revenue I will go back to what I said is I think were around 12%, we'll probably we might be a point or two from a mixed perspective that might change over the next couple of quarters, we're always going to be an ancillary business, but look you're always going to have services as part of our revenue.
Our services team have tremendous amount of expertise and knowledge of our customers. When there is the hardest problems to solve back the team that's going to solve it those are the teams that help train our partners and there is always customers theyre going to look for certain.
Deals to be implemented by Zora, that's how some companies want to roll.
Outside of that though we're happy it's our preference to go partner first and as I said to Rob earlier, we make our margin on the subscription revenue side, and that's where I want to be focused that's where we're doing really well on the margins and we'll continue to focus and I really look at the services I think when I talked to almost all of our investors I think most people look at the day.
Part of doing business, but it's really not the fundamental recurring part of our business, which is subscription revenue.
Great. Thanks, Tom Thanks, Jim.
Thanks, Andrew. Thanks. Your next question comes from the line of Jacobs <unk> of Lake Street Capital markets. Your line is open.
Hey, guys I'll just add my congrats here on the quarter and congrats to <unk> as well.
Two quick ones from me here.
Teen you'd noted that Si partners bookings grew sequentially.
From Q1 to Q2 I'm just wondering if you could kind of provide some commentary on what we're seeing in kind of as we go into Q3 here.
Ravi you on instrument.
Of the looking at the pipeline.
Alrighty, specifically with our Si partners.
That has continued the momentum that has continued.
And even to the extent, it's all as we look at our mix will changing in terms of <unk>, we're actually creating solutions with them and actually creating varied our actual packaged pieces that we go to market together with one of the actual great.
<unk> that we closed in our Q2 <unk>.
Through this with a partner.
Is it continues on that pipeline continues hey, the other thing I would just add to that Jacob is if I take a look at nice sequential growth and what the partner pipeline is looking like and in fact this was the highest quarter theyre generating pipeline I think in four or five quarters for that part. So we're really happy about how that's progressing with some of the <unk>.
<unk> that we made at the beginning of the year.
Okay, Great and then just last one here I know you broke out.
ACB cohort has grown.
In Boston, the $2 50 in over 500, but I'm just wondering about maybe the <unk>.
By year, So 2021, and 2022 cohorts, if maybe you could kind of give us some color on how they've grown.
Over the last year.
Year to year.
Now that's not something that we've.
Got right in front of US now it might be something that we can look at and talk about that in future calls so I'll keep that in mind Jacob.
Okay understood.
Best of luck going forward.
Yeah.
Alright, Thanks, Jacob Thank you.
Your next question comes from the line of Brent Thill of Jefferies. Your line is open.
Hi, <unk> Hi, Todd Ravi This is love soda onto Brent Thill.
Thank you for taking my questions.
Todd maybe one for you to start out with.
Just wanted to ask about the net IRR looked like that was around $10 million maybe.
Maybe down 9% year over year was was that in line with your internal plans or how does that compare to your internal plans.
Hey, Rob so thanks, a lot for the question at the end of last quarter, we talked about it I think we added about 888 9 million worth.
I thought it'd be flat, we actually accelerated some so I was very pleased that we did have that acceleration and again, we would expect that to accelerate.
In the second half of the year. The other thing is when I provide the guidance for the full year take a look at what do we have weighted in the second half and as you know not only zara, but most companies have much higher weighting in the second half.
Look at the guidance and what we've done historically, what we've got in that guide is less than what we've done historically weighted on the back end. So again, if I take a look at what we're seeing in the pipeline and what we're seeing in close rates. What we've done historically, we feel comfortable that we will see that acceleration continue into the second half.
Got it so I guess, just reconciling that with the comment around you're factoring in similar buying patterns into the back half guide are you at.
Expecting some acceleration in net new <unk>.
In the back half is that fair.
That is correct and as I said, a couple of things keep in mind. One is you certainly had a tough compare in Q2 of last year. So the second half of the year will be much easier.
These year compare for us, but again just as the cadence of our business works you certainly expect to see an acceleration in the second half as we start the year off kickoff new territories people build their pipeline develop that you start seeing that closed in the second and third quarter or the third and fourth quarters and obviously the fourth quarter is always our largest quarter.
As a company not atypical from any other SaaS company.
Got it and one quick follow up on the.
Obviously I appreciate the commentary around landing smaller and faster.
But I guess, how does that impact the upsell opportunity.
Over the longer term then.
Maybe over the near term how do you offset the smaller lands against DNR headwinds that youre seeing.
Thank you.
Hello. This is this is to you here I mean, that's a great question and so the question is look if you're doing smaller land what are the implications of that.
The reason, we highlighted we're still signing up the same target customer, where we believe the customer lifetime value is the same.
And so when we are doing a smaller.
Faster land our goal is ultimately once we get them live and that we can continue to grow with them.
And so that is.
The mindset I would have you approach.
How we're thinking about the business, yes Joseph.
That's right Matt.
Maturity for us to then expand and Thats. The relationship we have with our customers and the ability for us to do that and grow that as we as we go forward.
Strongly feel it's a great credit approach for us and we're seeing results from that.
Got it I appreciate it and one last.
And again I think the one thing that we've seen is it's not the size of the initial land, it's who have you targeted and what is the opportunity within their in their business and that's what we're being super disciplined about is taking those right customers that have the opportunity to bill So maybe that's the automobile.
<unk> that is at the very beginning of their journey starting to.
Monetize these new services, maybe that's a new company and the tech field thats growing or maybe that someone in the media business that is moving from an advertising to a subscriber model and those all provide us huge opportunities not only through the billing and the additional products. We can add there we're putting the full suite of products on.
And the other thing that's been a really good help on US too is zephyr and lands Zephyr tend to be a little bit lighter, but one of the things that you saw this quarter was two of the biggest deals that we had in closing one of the deals over $1 million was the Zephyr pluses aura in the Atlantic was another very nice meaty deal for us that we highlighted and again that was Zephyr pluses.
Laura So we've got a lot of opportunities as we can land.
At Assai is maybe not as large as some of the things we've done in the past, but those have nice growth opportunities in front of them.
Got it Super helpful. Thanks, Scott.
Your next question comes from the line of Joseph <unk> of Canaccord. Your line is open.
Hey, guys. Good afternoon, and we want to if you are listening and congratulations on your second.
Understood.
Getting the extra already.
A lot of questions have been answered and asked already but maybe we just I know you don't break out suffer all that much in kind of terms of its profitability profile and maybe some of the other metrics but.
It does seem like the business is doing well moving outside of the media vertical and so if there is any color at least qualitatively you can add.
On kind of its profile versus perhaps.
Our core software products and how we should think about it relative to and a mix contribution that might provide overtime.
Yes, we don't really break it out, but I would tell you that the zephyr team halfway through the year. They are above their plan for so far year to date.
And there is no nothing special about them that would change your gross margin profile.
The other thing I guess I would note Joe <unk> is one of the things we're seeing zoro plus Zephyr is an accelerator for us, especially in that media vertical and then the second point of that would be is that technology is now extensible elsewhere in the Saar portfolio you saw that within the upsell a 24 hour fitness, we've got other companies that were.
Talking with that are outside of the media vertical. So again, we feel really good about that but zephyr now is fully integrated into zora and so we don't necessarily.
Track the financials of the business, but as you know we're very disciplined when we put that in we made room in our investment portfolio it wasn't incremental and.
Last year as we took on that investment we saw that profit continued to improve.
Sure.
It does seem like a few quarters later or a year later it was a thoughtful AD. So congrats on that so.
And maybe secondly, I know you are kind of proactive with the cost structure here as the macro was slowing down and obviously we're seeing.
Some of the benefits there with some really solid profitability and free cash flow just.
In case, we get into like the situation of a high class problem in the macro gets better just kind of wondering how you may tweak your go to market from here versus.
What what might be a stronger macro and what we might expect.
Would we expect I know youre, not providing guidance, but would we expect to see backup flattening margin profile for a while or something like that or just some thoughts on your strategy around go to market if if.
If and when we get to a better macro thanks.
So I guess I'll answer that in two ways. Joe I think the first thing is we are absolutely committed regardless of what the macro looks like to expanding our margins now are you starting to see there is an opportunity to make investments and accelerate that we would certainly be able to do that <unk> got the team structured we have the leverage to be able to.
Add additional selling resources on and get good leverage from that so what you might see as the margins arent growing as fast, but theyre going to continue to grow.
Got it.
Thanks, very much guys nice to see the great results.
Thanks, Joe Thanks, Jeff Thanks, Sean.
There are no further questions at this time I will now turn the call back to <unk> for any closing remarks.
And thanks, everyone for joining us today.
Congratulations to the entire organization for another solid quarter, we obviously remain committed to our strategy and most.
Accordingly, we are looking forward to sharing additional product innovations with you all.
And talking to you on these calls and outside and the rest half of the year. Thanks a lot.
This concludes today's conference call you may now disconnect.
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