Zuora Inc

2021 earnings conference call. Joining us today for today's call are Zoar's founder and CEO, Team Zo, and CFO, Todd McElhatton. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad at that time. 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 Zora's third quarter fiscal 2021 earnings conference call. Joining me today are Tien Tso, Zora's founder and chief executive officer, and Todd McLehatton, Zora's chief financial officer. The purpose of today's call is to review our third quarter results, as well as provide our financial outlook for the upcoming quarter. Some of our discussion and responses today will include forward-looking statements, including with respect to our expectations, outlook, and financial guidance. So as a reminder, our actual results could differ materially as a result of a variety of factors. You can find information regarding those factors in the earnings release we issued today and in our most recent filings with the SEC. Finally, we will be referring to several non-GAAP financial measures today, and reconciliations to related GAAP measures are included in our earnings press release. As a reminder, last quarter we began to exclude litigation charges and benefits outside the ordinary course of business from our non-GAAP financial measures. For a copy of our earnings press release, links to our SEC filings, a replay of today's call, or to learn more about Zora, please visit our investor relations website at investor.zora.com. And with that, let me turn it over to Tina.

Thanks, Carolyn. And thank you everyone for joining us today on Zora's third quarter earnings call for fiscal 2021. I'm very pleased with our third quarter results. Let's walk through a few key highlights from the quarter. We exceeded expectations across our key financial metrics, including total revenue, subscription revenue, gross margin, operating income, and free cash flow. And this is even after backing out the impact of a one-time benefit that todd will discuss later in fact we reached a milestone of free cash flow break even one quarter ahead of plan we added 25 new customers in q3 including the largest deal in the company's history we closed six deals with over 500 000 in annual contract value we had over 100 upsells showing a strong continued potential of our land and expand go-to-market motion We helped 41 customers to go live. Over one-third of these go-lives involved a systems integration partner, showing strong progress in our alliances strategy. Finally, we had strong adoption of our most recent products. More than two-thirds of our customers are already using our platform capabilities like workflow, custom objects, and increased agility. And over a quarter of our customers are now using our analytics tool, which we just launched last quarter. These results show that we are making good progress on the themes that we outlined in previous quarters. First, in previous quarters, we've talked about how we believe that our market opportunity resonates with bigger companies, as changing customer preferences force big brands to rethink how they innovate and turn their customers into subscribers. And indeed, we are seeing more big brands embrace subscription models. Our enterprise pipeline continues to grow. We're seeing bigger deal sizes. Now, as we move up market, you may see the pace of net new customer ads per quarter be lighter than historical trends. But you'll also see overall ACV per customer trend higher. Second, as I mentioned on our last call, our platform is a critical part of our ability to meet the last mile needs of these larger companies. And indeed, our platform is resonating with our customers and prospects alike. The hardest part of running a subscription business is delivering the automation needed with agility. And our platform is truly what enables this. and differentiates Zora from other vendors in the marketplace. Our platform is a key reason why we have been successful and has allowed us to win deals that we otherwise would not have won. Third, you've heard us say that the system integrators are a really important partner in our journey, and those partners continue to deepen. Indeed, in Q3, SIs experienced increased demand for subscription and revenue automation offerings from their customers, and often relied on our technology to capitalize on this demand. Finally, you've heard us say in previous quarters that in order to scale to meet the demands of the marketplace, we needed to shift to a consistent way of selling, one that depends on systems and not just people, and one that works with enterprise accounts. We continue to see results from our go-to-market changes we implemented a year ago, which included refining our value-selling motion and our sales organization focus. I'll discuss this more in a few minutes. Let's drill into each of these four themes. First, we are seeing big brands continue to embrace subscription models. We continue to move upmarket and sign partnerships with global enterprise companies. During this quarter, we signed agreements with big brands in our core markets of high-tech, media, manufacturing, including companies like Fuji Xerox, Ili Cafe, Decathlon, and one of the top three electronic retailers in the U.S. We continue to execute go-lives with big brands across industries. In media and publishing, companies like Thomson Reuters and Media24. In tech, manufacturing, including Bosch, Automotive Services, Sonos, Panasonic, and Siemens Smart Infrastructure. We continue to help big brands begin to turn their customers into subscribers. Elite Cafe is a very interesting use case here. We're helping them launch a subscription service that will give them regular touch points with the customer base, as well as a steady, predictable source of recurring revenue. And we're seeing this dynamic play out across the entire consumer, retail, and consumer packaged goods space. We continue to help our large manufacturing high-tech clients find new sources of growth. In Japan, with the addition of Fuji Xerox, we're now working with the top five multifunction printer manufacturers. We're helping all five of them launch flexible subscription services within a very competitive hardware market. And we continue to grow the number of our customers with ACB at or over $100,000. This group now constitutes over 90% of our business, reaching the total of 653 companies at the end of the third quarter. So these larger big brand enterprise customers ultimately represent a significant opportunity for expansion and growth as they continue to shift their businesses towards subscription models. Let me shift now to provide some more color on the progress of our platform offering. We believe that the success we've had in closing these large deals is in big part due to our Zorro Central platform, which is a suite of developer tools that we launched early this year. Its features are now being used by two-thirds of our customer base. This is a key competitive differentiator, particularly within the large enterprise fields. So why is a platform so important? Well, a key part of winning the subscription economy is delivering a great subscription experience. Think of your own life in space, how much of it is run by services that you access from your phone or laptop, whether it's for entertainment, work, food, health, learning, or more. Our expectations are changing and companies know they have to adapt to meet these expectations. But delivering a great subscriber experience is not easy. Every touchpoint from the customer, service activation, payments, usage, renewals, upgrades, suspensions, every touchpoint requires coordination across a plethora of actions. Customer-facing operations like charging credit cards, internal operations like provisioning or shipping, and even financial operations like chargebacks or recognizing revenue. That's why automation is so critical. You can't deliver a great subscriber experience without automation. For example, we work with nine of the top 20 largest auto manufacturers. We added another one this quarter. Now imagine millions of cars on the road, all powered by connected services. Our platform workloads will today enable our auto customers to successfully orchestrate a number of connected car services from finding parking spots, listening to music, or subscribing to add-on capabilities, thereby enhancing the value that they're delivering to their customers. However, when automating the old way by hard-coding integrations on legacy platforms, you lose your agility, and this is why our platform is so important. We deliver automation at scale while maintaining agility. In fact, as Porter, one of the top three electronic retailers in the US, cited our platform as the key factor in its buying decision because our platform tools will allow this company to quickly and efficiently launch and manage warranty programs, repair services, video streaming trials. These are real tangible benefits that this customer is using to enhance value with its own customers. In short, our platform tools allow companies to extend and integrate more into their business. It helps those companies solve their last-mile logistical needs, and it gives them much-needed agility, and it makes us more sticky as a result. Let me now review our progress with our system integration partners. As you know, the onset of this year, we have aligned our alliances team to deepen our relationship with our SIs. These efforts are beginning to bear fruit. Zora has established strong partnerships with Accenture, Capgemini, Deloitte, EY, and PwC, among others. In fact, in Q3, we expanded our SID relationships, including signing a formal agreement with a large technology services company who has embedded Zora into their enterprise solution stack for digital transformation initiatives. Our joint customers now include some of the world's largest automobile manufacturers, as well as Decathlon, a large retailer in France. We signed an agreement with PwC Consulting Japan to bring Adly service solutions to that market. And several of our FIs have dramatically increased their number of certified partner consultants this year. Most importantly, we're seeing a number of our FI partners actively influencing and even sourcing new deal activity in Zora. In Q3, we increased the ACV of deals closed that were partner sourced by over 150% quarter over quarter. And we nearly doubled year over year ACV from deals sourced with partners. In fact, over one-third of the 41 goal lines we had this quarter involved an SI partner. We think we're still early in our SI initiatives, but we are pleased with our current progress and believe that we are well-positioned for continuing momentum in the SI ecosystem based on the quality of the global pipeline we see ahead. And, of course, as our business mix continues to shift towards subscriptions and away from services, we expect our overall gross margins to continue to improve. Finally, let me provide an update on how our new go-to-market changes are working. The short answer is they are working well. The past decade plus, we believe that Zora has built the most sophisticated industry-leading subscription management tools. With these products in our arsenal, we've opened up a large market opportunity, which will require changes in how we go to market. Specifically, we shifted our go-to-market focus on the enterprise space, where we believe we have the largest addressable market. We implemented a value selling methodology, one that emphasizes return on investments to our customers. We moved from a hunter-farmer model to having all sellers own their accounts throughout the entire customer relationship, meaning the higher quality relationships that drive upsell opportunities. We moved from individual selling to a team selling model with a full complement of skills needed to serve larger customers, including our newly formed subscribed strategy group. Everyone on the team is focused on the same set of customers, and this leads to higher levels of customer success. These changes are starting to pay off as evidenced by the number of enterprise customer wins in the quarter, the number of upsells, and the growth of our enterprise pipeline. All of these have also contributed to a steady improvement in win rates over the past year. In addition, when we monitor the distribution of attainment by sales team, we are seeing more consistent productivity throughout our sales organization, giving us increased confidence that these initiatives will contribute to additional scale in our go-to-market efforts. Lastly, we expect this to translate into higher net value retention over time, delivering greater lifetime value. In short, we believe we have made meaningful improvements in Zora's go-to-market initiatives, and we are poised for strong, long-term, continued execution as we look ahead. Now let me turn over the call to Todd to discuss our financials in more detail. Todd.