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spk08: Good afternoon and welcome to Zora's second quarter fiscal 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchdown telephone. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Ms. Luana Woke, Head of Investor Relations for Introductory Remarks.
spk07: Thank you. Good afternoon and welcome to Zora's second quarter fiscal 2022 earnings conference call. Joining me today are Tim Doe, Zora's founder and chief executive officer, and Todd McElhatton, Zora's chief financial officer. We'll also have Robbie Trauber, our chief revenue officer, joining us for the Q&A session. The purpose of today's call is for us to review our second quarter results and provide a financial outlook for the upcoming third quarter and fiscal 2022. Some of our discussion and responses today will include forward-looking statements. So as a reminder, our actual results could differ materially due to a variety of factors. You can find information regarding those risk factors in the earnings release we issued today and our most recent filings with the SEC. And finally, we will be referring to several non-GAAP financial measures today, and reconciliations to related GAAP measures are included in our earnings release. For a copy of our earnings release, links to our SEC filings, a replay of today's call, or to learn more about Zuora, please visit our investor relations website at investor.zuora.com. And with that, I'll turn it over to teams.
spk04: Thank you, Luana, and thank you all for joining Zora's second quarter fiscal 2022 earnings call. To start, let me say that I'm very pleased with our Q2 results. We once again delivered a strong quarter, exceeding the guidance we provided across our operating metrics, including total revenue, subscription revenue, and non-GAAP loss from operations. The results of this quarter show that the innovations that we have created across our four product lines are delivering more value to our customers. And as a result, this quarter, we were able to deliver a dollar-based retention rate of 108%, representing a nine-point increase year-over-year and a five-point uptick from last quarter. Now, we set a goal at the start of the year to exceed 105% dollar-based retention rate by the end of our fiscal year, and I am happy to report that we exceeded that goal two quarters early. We believe the strategy we laid out earlier this year at our investor day is working. First, Both disruptors and incumbents alike continue to grow their subscription businesses, and they are coming to Zora for our technology, expertise, and ecosystem. And second, our multi-product strategy with Zora Billing, Zora Revenue, and Zora Collect, all built on the Zora Central platform. This strategy continues to enable a land and expand motion executed for what I believe is a truly unique go-to-market organization that emphasizes long-term strategic relationships with the best companies in the world. In short, I am happy with our overall momentum as we continue to execute against the fiscal goals that we announced at the beginning of the year. Let me dive into the highlights from the quarter. Market trends we identified at the start of the year are continuing to play out. Companies are increasingly waking up to the power of the subscription model. And we're seeing both fast-growing disruptors and large enterprise incumbents investing in recurring revenue business models. In both cases, these companies are looking for guidance on how to navigate their subscription journey ahead, and they're turning to Zora. Let's take a disruptor. At our investor day earlier this year, we shared the story of Zoom, of how we powered their torrid growth over the last 18 months. Well, this quarter, a large enterprise marketing SaaS leader reported over 200% increase in annual recurring revenue from just two years ago. And now they are invoicing more than a billion dollars in revenue across 125,000 subscribers all through Zora Billings. We've been working with them since before they went public, and it's our system that's enabled them to launch new offerings, evolve to a multi-product company, and implement the more complex monetization models that come with that level of sophistication. On the other side, let's look at an incumbent who's pivoting to the subscription economy. This quarter, we signed a 100-year-old robotics company with over $20 billion in revenue. who is rolling out a subscription based marketplace to turn their IOT investments into new revenue streams. Now realizing their existing systems were not built for this new model, they chose Zuora to help them execute the strategy across the 100 plus countries that they operate in. We're also seeing companies come to Zuora after initially selecting other solutions that simply could not deliver. This quarter, we brought on a disruptor in the IT security space who originally signed with a competitive solution from a CRM vendor. Then they found themselves stuck in a never-ending implementation cycle, and so they switched to Zorro. Now, with our platform, they will be able to manage the entire subscription monetization process, and they have the agility they need to roll out new products and pricing offers and to easily sign up new customers across multiple acquisition channels. Now, these are just a few examples, but we believe the fast-scaling disruptors and enterprise incumbents make up the sweet spot of the subscription economy, and our strategy to focus here is driving the business results that we delivered in Q2. Now, turning to product, at the start of the year, we announced a multi-product land and expand strategy designed to give us multiple paths to growth. On the land side, a few years ago, our Zora billing solution was our only key beachhead. Now, fast forward to today, we are now seeing multiple Zora product beachheads, including, of course, Zora revenue. For example... In Q2, there's a company that makes smart cutting machines who have seen tremendous growth over the past year. And in preparation for their IPO, they turn to Zora Revenue to automate the complexities of revenue recognition to help them become compliant with the latest accounting rules and to help ensure that they were set up for additional scale for years to come. And so in Q2, the number of customers with ACV over $100,000 or more continued to grow, and we closed the quarter at 694 within this cohort, up 17 sequentially. This customer group represents 93% of our business. And simultaneously during the quarter, ACV per customer reached a new quarterly high. On the expand side, we're seeing a record-breaking upsell numbers. For example, iRobot initially turned to Zor Billing back in 2020 to iterate quickly and test different subscription models for a new service, iRobot Select. Now, as these pilots progressed and the subscriber base expanded, the company then invested in Zora Collect in an effort to reduce involuntary churn from failed credit card payments. As another example, recently a leader in application performance management, a public company, and a longtime Zora billing customer. they moved completely to a usage-based model. This added tremendous complexity to their revenue recognition. And so in Q2, they've now added Zora Revenue to create a complete order-to-revenue solution. Now, what's enabling these upsell and cross-sell motions is the tight, tight interlock between our multi-product strategy and our go-to-market approach. And in Q2, this approach that we highlighted at Investor Day continued to demonstrate tremendous progress. In addition to lowering churn, expanding sales, and allowing us to hit our full-year dollar-based retention rates two quarters early, our field organization continues to successfully take these customers live. During the quarter, we saw our second-highest quarterly ACV go live, including with HERE Technologies, Monster Worldwide, and Xerox. And as we said, our go-to-market strategy is also about driving scale in our own operations and accelerating growth by cultivating a network of global system integrators. And this strategy continues to show traction and deliver results in Q2. First, our SI partners are contributing to our growth. In Q2, over three-quarters of our new business logos were influenced by an SI partner. Now, these deals are also coming in with a higher average selling price, as we saw new customers like Daihatsu, Talus, and Rev.com select Zora thanks to the successful collaboration with our partners. Second, our SI partners are scaling our ability to take our customers live. This quarter, over 40% of customer go-live actually involved a system integrator partner. And third and finally, we're seeing our partners increase the investment they are making in Zora. In Q2, we saw high double-digit growth of the number of certified consultants on a quarter-over-quarter basis, demonstrating that our partners are investing and increasing their commitment to Zora, which sets us up for future growth. In closing, The strategy that we laid out at the start of the year continues to deliver according to our expectations. This is the story of Q2. We're seeing both fast-scaling disruptors and enterprise incumbents turn to us. Our multi-product and land-expand strategy helped us reach our full-year target for dollar-based retention rates, two quarters ahead of plan. Investments we made in our go-to-market are helping us successfully take our customers live into a line with our SI partners in order to accelerate growth and scale our deployment capabilities. And finally, we're seeing that in addition to our technology, our unique expertise in the market is why companies continue to turn to us to help guide them on their journey to succeed in the subscription economy. With that, I'll turn the call over to Todd to review our financial performance.
spk03: Thank you, King. And thanks, everyone, for joining us today. I'll be providing an overview of our Q2 results and discussing our financial outlook for the third quarter and full year. As a reminder, today's discussion includes non-GAAP financial measures. Beginning this quarter, we updated our method for calculating certain non-GAAP financial measures related to internal use software. You can find the details in today's press release, which includes a reconciliation table of selected GAAP to non-GAAP measures that reflect the adjustments made to both our current and prior year financial results. Our performance in Q2 was strong across our key financial metrics. We exceeded expectations in subscription revenue, total revenue, non-GAAP operating loss, and free cash flow. Q2 was highlighted by multi-product deals with both disruptors and incumbents, strong go-to-market execution, and great contribution from our SI partners. We have built a strong foundation for long-term growth, and Q2 brought incremental progress towards our goals. Looking ahead, we'll continue to focus on ARR growth, dollar-based retention, and free cash flow. So let me take you through some of the key metrics this quarter. In Q2, our dollar-based retention rate was 108%, a significant improvement from 99% in the prior year, as we lapsed the higher turn levels that we experienced in Q2 of last year, along with our focus on retention and upsell. Looking at our customers at or over $100,000 in ACV, we ended with 694 customers. This group of customers represents 93% of our business, We closed two deals with ACV of $500,000 and above, the same number as a year ago. As Tien noted, during Q2, we reached new quarterly record for ACV per customer. Turning to transaction volume, our systems processed $18 billion of volume in the quarter, representing 42% growth year over year. While process transaction volume is helpful in understanding how much of our customer's business is running on our platform, it does not track linearly with quarterly revenue as customer gains efficiencies as they scale. Let me review our Q2 financial results. Subscription of revenue grew 23% year-over-year to $71.5 million and represented 83% of total revenue. Note Q2 subscription revenue included some one-time non-recurring benefits totaling $1.1 million, which were not reflected in our prior Q2 guidance. This was primarily related to revenue we recognized upfront, which was not anticipated in the quarter. Professional services revenue decreased 10% year-over-year to $15 million. As Tien mentioned, we continue to make progress on our strategy to shift more services to our system integrator partners, and we view this continued decline in service revenue as a positive trend. Total revenue closed at $86.5 million in Q2 and grew 15% year over year. As previously mentioned, our overall revenue growth was impacted by our strategy to reduce the mix of our direct professional services towards our SI partners. This not only enhances our go-to-market opportunity, but also benefits our overall gross margin. As a result of our success in driving more professional services to our SI partners, non-GAAP blended gross margin was 64%, an improvement of approximately 90 basis points over the prior year. Non-GAAP subscription gross margin was 79%, the same as Q2 in the prior year. During Q2, we made the decision to accelerate the move out of our data center to a cloud-hosted service, which will enable us to operate more efficiently and offer us additional capacity as we scale over the long term. In the short term, will occur additional hosting expenses to make this transition. During the second quarter, we recognized $0.6 million of additional expense and expect to incur $2.8 million expense and our cost of goods sold during the second half of this fiscal year. Non-GAAP services gross margin was negative 7%, driven by investments in training our partners and one-time employee-related benefits. Our goal is to continue to run services at or near breakeven for the near future as we further engage with our SI partners. Non-GAAP operating loss was $3.9 million in the quarter, compared to $0.6 million in the prior year, adjusted for the non-GAAP accounting changes mentioned earlier. This was driven by additional investments in sales, marketing, and R&D. This resulted in non-GAAP operating margin of negative 4.6%, a decrease from break-even in Q2 of last year. As I shared with you on our last earnings call, operating margins will be roughly flat this fiscal year as we absorb expenses which weren't included in last year and accelerate investments. Now looking at ARR and free cash flow. Earlier this year, we introduced some new KPIs to help investors track our progress, including ARR growth. I'm happy to report that in Q2, ARR grew 18% year over year. This was ahead of our target of 17% ARR growth for the fiscal year. This was driven by strong upsell performance as well as new business. We continue to focus on our objective to reach mid-term ARR growth of 25% to 30%. Free cash flow was negative $4.4 million, driven by the seasonality of our business and the timing of our employee stock purchase plan. Total capex for the quarter was $1.7 million. Turning to the balance sheet, we ended the quarter with $201 million in cash and cash equivalents, a $3.5 million increase over the prior quarter. We continue to be prudent with spend and are maintaining a healthy cash position to manage the business. Our fully diluted share count at the end of the quarter was approximately 143.3 million shares using the Treasury stock method. In Q2, our execution drove improved performance. We continue to be disciplined in our investments, targeting enterprise customers, focusing on the land and expand motion, and working with SI partners. Now let's turn to our financial outlook. As we shared with you in the last call, this is a year we plan to accelerate our investments in go-to-market and product development, while absorbing costs that were not in our run rate last year. The updated guidance includes the expenses for the data center migration in the second half that I mentioned earlier. We continue to expect to be free cash flow positive for the full year. For fiscal Q3, we currently expect total revenue of $86 to $87 million, subscription revenue of $71 to $72 million, non-GAAP operating loss of negative 3.5 to negative $2.5 million. Non-GAAP net loss per share of minus 3 to minus 2 cents, assuming weighted average shares outstanding of approximately 125.2 million. For the full year, we are raising our revenue outlook. We currently expect total revenue of 340 to $342 million. Subscription revenue of 280 to $282 million. Non-GAAP operating loss of minus 13 to minus $11 million. Non-GAAP net loss per share of minus 13 to minus 11 cents, assuming a weighted average shares outstanding of approximately 124.3 million. In closing, I'm very pleased with our performance in Q2. We've laid a strong foundation to achieve Zora's long-term objectives and are continuing our cadence of execution. Next, we will take your questions. Operator, please open the call for questions.
spk08: Thank you, ladies and gentlemen. If you have a question at this time, please press the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the count key. Your first question comes from the line of Brent Hill from Jefferies. Your line is open.
spk02: Hi, guys. This is Love Soda from Jefferies on for Brent Hill. Congrats on a nice quarter. I have a couple questions. One was, I know a team you mentioned, it spoke a little bit about, you know, your win rates improving and that, you know, you're winning against some bigger competitors today. within the space, could you maybe give us some context as to, you know, as you see the opportunity going forward, you know, is it coming from win rates against competitors improving, or is it more greenfield as we think about it?
spk04: Well, it's a great question. I would say when you look at where our business is coming from, it's certainly – coming from both areas, right? It's coming from companies that have tried other solutions and it doesn't work. And it's also coming from brand new situations. Look, I would say this, right? Billing is not, in this new world, a commodity. In this new world, companies are realizing, especially after last year, that their customers really expect something completely different. They expect a service. They expect different ways of paying for the service. They want a very different subscriber experience like Instagram. So the Instacart experience that we're all now used to. And you really need a vendor and a provider and a technology solution from a company that's just focused 100% on this space. And companies are realizing that to save money or to buy from a vendor that's not really focused on this area is not the way that they gain competitive advantage. And, Ravi, what would you say, given what you're seeing?
spk00: Yeah, it's a really interesting point. Thank you, Tina. Look, as we're seeing customers also, on the one hand, become more sophisticated, you know, we're seeing that other solutions just do not meet, you know, their customers' expectations. You know, I was speaking to, you know, sort of senior management at the company that Tina even referred to, and they're looking at it. They want... capabilities out of the box, right? What they do not want in their words, or they do not want a lifetime of customizations. And that is also why we're seeing these companies come to Zora.
spk02: Got it. Quick follow-up, if I may, either for Todd or Tien. On the net retention rate improvement, you know, could you give us some context as to how much of it was you know, attributed to churn levels improving versus a year ago and how much of it was upsell versus and cross-sells?
spk03: Thank you. So, Love, really balanced. We did a great job. We talked about the fact that we've made significant investments in customer success. Actual churn was down 50% year over year, a little more than 50% year over year. As a percent of ARR, it's one of the best levels that we've seen, again, in about 10, 12 quarters. So, you know, we've done a really nice job on retaining the customers. But then, again, we had a record quarter on upsells. And that's, again, continuing to be very balanced. You know, typically, you know, if you went back 12, 18 months ago, we were much more reliant on volume. Today you see it much more balanced, new products that were coming out, the multi-product strategy. is absolutely resonating with customers. So I feel really good about that dollar-based retention being a balanced performance coming from both retention and upsells and the upsells being across the portfolio.
spk02: Great. Thank you. I'll pass it to you.
spk08: Thank you. And your next question comes from the line of Joseph Vaffey from Canaccord. Your line is open.
spk06: Hey, guys, good afternoon and great to see the continued up-tempo cadence in the business here in the quarter. So congrats on that. So just one more on net retention, which, you know, was great this quarter. And I know you said you had a record quarter on upsell. Just wondering how that kind of upsell pipeline looks from here. or how we should think about maybe net retention for the rest of the year, and then have a quick follow-up.
spk03: So, Joe, first of all, I think one of the things we talked about at Analyst Day, that we have an opportunity of about $450 million within our install base. So we feel there's still a lot of runway left. Customers have a strong interest in new products that are coming out. We see a lot of usages you saw today on the platform. So we feel really good about what the future looks like for upsell. So from that standpoint, we feel good. We hit the 105% plus. We're in that plus range. I'm going to keep the guidance at that. You know, from that standpoint, we certainly don't see ourselves falling backwards, but I'm going to be prudent and, you know, we'll update you next quarter as we progress.
spk06: Sure. Fair enough. Thanks, Todd. And then... Just, I'd just be curious on, you know, you're signing both, I think, you know, the way you classify them as incumbents and disruptors and channel that's coming from them, you know, relative to your SI. Do you see, are the SIs bringing you, I would imagine, more of the incumbents as they're moving with their digital transformations? Or are they also bringing you some of the newer disruptors that are actually, you know, perhaps becoming SI customers themselves? Thanks a lot, guys.
spk04: I would truly say that it's both, especially when you look at some of the disruptors. You know, they're really fast-growing, and you guys attract this as well. There's a ton of companies that are coming up ready and primed for the public markets. And when you reach that $50, $100, $200 million inflection point as a fast-growing disruptor, you know you need help, right? You've got billing challenges, you've got compliance challenges, you've got ASC 606 challenges, and a lot of them are reaching out to the PWCs, the EYs, the Deloittes of the world, and that's where we really do intersect with them. Ravi, any color that you want to add?
spk00: Yeah, I think, as you say, there is a balance there, right? We're finding from our side it's both sort of source challenges pipeline and influence pipeline. And you've seen, you know, they're seeing so much digital transformation in the space. So there's an awful lot where they're helping that digital transformation. And at the same time, as people go towards more towards public offerings or whatever else, they're having a lot of help from those SICs. So we're seeing very much both in the disruptors and in the incumbents.
spk06: Thanks very much, guys.
spk08: Thank you. Your next question comes from the line of Andrew Degas-Perry from Barenburg. The line is open.
spk01: Thanks for taking my question. At first, it was interesting to find two manufacturers among the new customer logos you acquired. I was just wondering if maybe you could elaborate, like, the sales motion with those type of customers and maybe elaborate as well as what kind of products were they taking? Did they take anything beyond billing? Was there some of the other strategic products that you have as well?
spk04: Yeah. You probably know from past conversations, Andrew, that I'm a huge – I'm very bullish on the manufacturing sector. I mean, if you even pull back and look at 50, 60, 70 years, people have a sense the manufacturing sector is starting to decline. And we're really seeing a major reversal of that, and it's all because of IoT – And when every single physical product is connected to the Internet, the same revolution that you found in the software sector, right, where software became software as a service, the same revolution you found in, say, entertainment and media, it's happening in the physical products world. And so the manufacturing companies we work with, the common thread is they spent the last four, five, six years investing in IoT infrastructure, connecting all their products to the Internet. And now their imagination is just bursting with new revenue streams that they could get. And some of these could be, you know, initial launches even, right? We're able to help them launch a brand-new, you know, Internet IoT-driven service in 90 days or less and grow from there. I mean, that's really one of the stories, the story of Caterpillar comes to mind in the work that we've done. And then some of them are actually, you know, they've had a service out there for some time. It's going really, really well. Last year, they're seeing that these are the parts of their business, their revenue streams that are growing the fastest, and they're doubling down in those areas. And, you know, a company like Philips, for example, will come to mind as an example there.
spk01: That's helpful. And then on your certified partner count, the growth looks pretty impressive. I was just wondering, should we use that as a metric or as a derivative of your growth in your strategic partnerships?
spk03: No, I don't think I would do that.
spk01: Okay.
spk03: Thank you. Thanks, Andrew.
spk08: Thank you. And your last question comes from the line of Scott Berg from Needham. Your line is open, sir.
spk05: Hi, everyone. Congrats on the nice numbers, and thanks for taking my questions. I guess this question is probably for Tina or Robbie. A lot of questions on upsell and churn, but how about the net new customer sales in the quarter and the pipeline? As you look at those deals in the three beachheads team that you mentioned, Are those deals still highly skewed towards the billing side of the equation, which I think we probably all suspect? Or are you seeing nice traction with initial lands on the other two modules as well?
spk04: Yeah, yeah. So what I try to highlight on the call is we're definitely seeing new lands with the other modules. And the Zora revenue was one of the examples that we gave. Overall, so we're pretty happy. We're pretty happy with the new land motion. We're pretty happy with the new business. If you look at it, the number of customers continues to tick up quarter over quarter. And at the same time, right, ACV per customer on these deals, the deal sizes are getting bigger as well, which is a really positive sign. And so that part of the business continues to work well. And we're really happy just with the blended aspect of the business, right? At the end of the day, these aren't two businesses. These are new customers coming in, and we want to make sure that we continue to do that and continue to have a fantastic path for growing our value and footprint within those accounts and translating that into additional revenue.
spk05: Got it. Helpful. And then from a follow-up perspective, Todd, you've certainly highlighted the mix of services moving to partners, you know, the last couple quarters, and I think we understand that general progression there. But where should services fall out, either as a percentage of revenue or on maybe an absolute basis here once that move is done? And then I assume we probably work our way a little bit higher from there just in relation to the national growth of the company.
spk03: So I think when we talked at Analyst Day, we said, you know, we thought it would be around 15%. It may, you know, it may bounce a couple points one way or another. We'll make sure we do the right things for our customers. But I think the SI partners that we see coming in, they're training up lots of people. They're a great channel for us, and, you know, we're more than happy for them to take on that business. Great. That's all I have. Congrats on the good quarter again. Hey, thanks again, Scott. Thanks, Scott.
spk08: Thank you. I'm showing no further question at this time. I would like to turn the conference back to our CEO, Mr. Tinso, for any additional remarks. Sir?
spk04: Great. Thank you. Thank you. Well, before I close it out, I just wanted to thank all our CEOs. Their innovations, their contribution, and their continued execution, these are what really makes us who we are. Our people are what makes Oregon an incredible place, and I'm incredibly proud of what we accomplished together in Q2. It is clear from our dollar-based retention performance that our land and expand enterprise strategy is working. Our products are resonating with our customers. Our ARR growth remains strong, and the subscription economy continues to have a lot of room for upside. We feel well-positioned and positive about the future based on our overall momentum this quarter, and we feel good about where we are. Thank you for joining us today.
spk08: Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining Human All Disconnect.
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