Zuora Inc

Good afternoon and welcome to Zora's first quarter fiscal 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. With that, I would like to turn the call over to Luana Wolk, Head of Investor Relations, for introductory remarks.

Thank you. Good afternoon and welcome to Zor's first quarter fiscal 2023 earnings conference call. On the call today, we have Tim Zoh, Zor's Founder and Chief Executive Officer, and Todd McElhatton, Zor's Chief Financial Officer. Robbie Trauber, our President and Chief Revenue Officer, will also 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 law. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim any obligation to update our 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 discussions of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC. And finally, our discussion today includes non-GAAP financial measures. 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's results. Our results, press release, and a replay of today's call can be found on Zora's investor relations website at investor.zora.com. And with that, I turn the call over to you, team.

Thank you, Luana, and thank you, everyone, for joining us today. Welcome to Zora's first quarter fiscal 2023 earnings call. Year one was another solid quarter and yet another proof point of our consistent execution. The trends that the subscription economy is built on transcend any near-term macro-level uncertainty. The biggest and best companies in the world continue to invest in creating and growing recurring revenue streams. Our technology continues to lead the market, and the execution structure we put in place over 18 months ago continues to deliver consistent results. First, some highlights. In Q1, we exceeded the guidance again for total revenue and subscription revenue. while closing the quarter at the high end of guidance for non-GAAP operating loss. In Q1, our dollar-based retention rate was 110%, up significantly from 103% year over year. Our 112% plus goal for this year remains intact. In Q1, our ARR growth came in at 20%. up from 14% in Q1 of last year, and subscription revenue growth came in at 21%, up from 14% in Q1 of last year. Finally, I'm proud to say that Zora is now a carbon-neutral company, which we announced in our new ESG impact report, and we'll talk more about later on the call. As usual, let me share some observations from the quarter on our market, our product, and our go-to-market execution. First, we continue to see a large opportunity in the subscription economy. Companies continue to see that when the rest of the world faces volatility, the subscription economy can provide predictability, such as the power of the recurring revenue model. And we are seeing this trend play out in our customer base. Some examples. Bloomberg, our customer, grew its subscription revenue by 58% in 2021 compared to 2020. GoPro, another one of our customers, just announced on their latest earnings call earlier this month that their subscription and service revenues are up 73% year over year. And Zoom, our customer, is now five times bigger than they were before the pandemic. Today, the company makes over a billion dollars a quarter While two years ago, the company was making roughly $200 million a quarter. In fact, we continue to see durable demand as more companies and industries embrace the recurring revenue model to navigate the current environment. And our focus on the enterprise segment gives us additional stability in these times of uncertainty, allowing us to land new large customers across multiple industries. For example, this quarter in publishing, we signed up the New York Times. In manufacturing, we signed a multinational electronics manufacturer with more than $2.5 billion in revenue known for its audio and video equipment. In financial services, we signed one of the largest and technology-forward US banks with more than $30 billion in revenue. These companies are turning to Zor because our products can help give them the agility they need to adapt their services as markets change, to manage the complete quote to cash and revenue recognition processes at scale, and to orchestrate the experiences their customers are having with these new services. In fact, companies are finding that we have the most complete monetization platform that spans quoting, billing, collections, and revenue recognition. And in Q1, This was a big differentiator. In Q1, we saw more than half of our new logos buying more than one product and a quarter buying the entire Zora suite. For example, BNC Software, a global leader in software solutions for the autonomous digital enterprise, turned to Zora to be part of their quote to cash and revenue recognition transformation. Zora will support the company's ability to deliver their SaaS offerings as the central source of all of BMC's order management and revenue recognition. In addition, our multi-product footprint continues to fuel our land and expand strategy. In Q1, we saw three expansion wins with upsell deals valued at $500,000 or more. Customers like Siemens, And Q1 expanded their work with Zora to power new recurring revenue streams across additional divisions of their business. All this has fueled multiple quarters of ARR growth and strong dollar-based retention rates. Now within our portfolio of products, Zora revenue continues to shine. We're seeing growth revenue deals grow even bigger with a continued strong pipeline. For example, in Q1, a professional networking social media platform with more than 800 million members. They tapped Zora to better manage the entire revenue recognition process. We continue to see success in our ability to cross-sell Zora revenue into our install base, such as with fast-growing disruptors like Invoca and CarGurus. They saw how critical it was to orchestrate their quote to cash in revenue recognition processes. As we help these companies scale and billing becomes more complex, revenue recognition is a natural upsell opportunity. Now, we're pleased with the progress we've made on the product front, but we're equally proud of how our go-to-market strategy is also delivering. As we said, we believe the sweet spot in the market for us lies with large enterprises, and we see this playing out in our deals. In Q1, we closed Six deals with ACV of $500,000 or more. And two with ACV of a million dollars or more. Year over year, our average sales price for new logos has more than doubled. Now these enterprises are turning to Zora because of our technology, but it's also because of our unique expertise. The depth of our customer base is truly remarkable. And a few years ago, we created our subscribed institute to tap into the collective intelligence of this unique asset. We created the journey to usership blueprint built off of 15 plus years of experience to guide companies through the process from launching to leading in new digital services. And this is turning out to be a big, big differentiator for us. It's also a key factor in attracting more system integration partners to our ecosystem. And this quarter was no exception. In Q1, we saw our partner strategy continue to deliver for our business. Our partners continue to influence over 70% of all new business transactions. In Q1, and our partner source pipeline continues to grow. In Q1, we reached a big milestone. in our partner certification efforts. We now have more than 450 globally certified consultants with our SI partners. This represents over 3x growth compared to this time last year. Our strong relationship with partners continues to gain momentum. I'm truly excited to share that at Deloitte Digital's recent Alliance Summit, we learned that Zora is now Deloitte Digital's fastest growing emerging partner globally lloyd digital is also dedicating resources to help even more enterprises transform their business by monetizing new digital services with us in this new zora factory finally on to a company initiative that's been very close to me personally our work on esg from day one we believed that a world subscribed could be a place where subscriptions and recurring revenue models can provide broader access to goods and services to increase inclusion and equity and prioritize sustainability. These principles are deeply ingrained at Zora. Earlier this month, we formalized and committed to Zora's efforts with our first ESG impact report, which highlights the accomplishments that I am especially proud of. First, as I mentioned earlier on the call, as of fiscal year 2022, Zora is officially carbon neutral. Of course, we are committed to maintaining carbon neutrality going forward. We also released our diversity statistics as of the end of fiscal 2022, demonstrating the strength of our diverse and inclusive workforce. In fact, 41% of Zora employees, 60% of our executive team, And over half of our board of directors are members of underrepresented groups. And we donated more than a million dollars this past fiscal year to impact-driven organizations across the globe through our Zora for Good Impact Fund. In closing, our strategy is working, and we continue to deliver according to our plan. There are certainly external factors beyond our control affecting the market. but we're focused on building a successful long-term company, delivering durable and profitable growth for years to come. I, for one, continue to be excited about the future. Big thank you to our CEOs, as always, for another successful quarter and for making our accomplishments possible. Now, I'll turn the call over to Todd to review our financials. Thank you, Gene, and everyone for joining us today. Q1 was a solid financial quarter across the board with key growth and profitability metrics meeting or exceeding our expectations entering the quarter. We are pleased with the results given the current macroeconomic environment and the headwinds we are seeing with exchange rates. Let me start with top-line results. Subscription revenue ended at $78.5 million, growing 21% year-over-year and exceeding the high end of our guide. This was driven by continued improvement in our go-to-market execution and market demand, especially in North America. Professional services revenue was $14.7 million, a decline of 3% year-over-year. This aligns with our strategy to drive more implementation work to our system integrator partners, which support our plan to improve our mix towards healthier total gross margins. I will provide more color on our progress for these system integrators later in the call. Total revenue also ended above the high end of our guide at $93.2 million, up 16% year over year. On a constant currency basis, total revenue grew 17%. Non-GAAP subscription gross margin was 79%, a 90 basis points improvement over prior year. Non-GAAP professional services gross margin was 1%, consistent with our plans to run services at or near breakeven. As team mentioned, we grew our partner certified consultants threefold this past year to over 450 consultants, which fueled contributions from partner source and influence deals. This has also contributed to our increased average selling price. We are very pleased with the traction we are seeing, especially in the enterprise space. As we grow our partnerships with system integrators, Our non-GAAP blended gross margin saw an improvement of 330 basis points year over year, ending the quarter at 67%. Non-GAAP operating loss was $0.2 million compared to an operating loss of $2.4 million in the prior year. This was driven by our continuous top-line growth and closely managing our investments in the business. This resulted in a non-GAAP operating margin of negative 0.2%. an improvement of 280 basis points compared to Q1 of last year. Our fully diluted share count at the end of the quarter was approximately 147 million shares using the Treasury stock and if converted methods. Moving to some other key metrics for the quarter. In Q1, we maintained our dollar-based retention rate of 110% despite foreign exchange headwinds. This was a strong improvement of seven points year over year. This illustrates the resiliency of our current revenue streams, especially during times of uncertainty. At the end of Q1, customers that spend at or above $100,000 in ACV continue to represent 94% of our business, and we ended the quarter with 746 customers, a decrease of one sequentially. More importantly, we are pleased with the growth of our average selling price. Our new logo, Average ASP, more than doubled year over year. Our strong customer expansion is clear evidence of the success of our multi-product strategy. Large enterprises continue to turn to Zora for a complete monetization platform. In Q1, we closed six deals with ACV of $500,000 or above, up one from last year. Two of these deals had ACV of greater than $1 million. The differentiation of our product portfolio is fueling larger and longer duration deals. This is evident in our total remaining performance obligations, which grew 29% year-over-year. Turning to billing transaction volume, our systems processed $21 billion of volume this quarter, representing 21% growth year-over-year. As we've noted before, process billing transaction volume is not indicative of our revenue growth because our customers gain cost efficiencies as they scale. This metric is helpful as it highlights the level of a scale we offer our customers, another key differentiator for our solutions in the enterprise space. And now, looking at ARR and free cash flow. Starting this quarter, we will disclose the absolute dollar value of ARR. ARR is defined as the annualized recurring value at the time of booking or contract modification for all active subscription contracts at the end of a reporting period. ARR excludes the value of non-recurring revenue, such as professional services, as well as contracts with new customers with a term of less than one year. At the end of Q1, ARR was $326.3 million and grew 20% year-over-year. We believe this additional disclosure provides investors with further insights into our performance. Free cash flow was $3.7 million for the quarter. As a reminder, free cash flow may fluctuate on a quarterly basis through the timing of cash collections. We believe it's best to assess our cash flow performance over a longer term. We will continue to invest in the business to foster sustainable growth while driving towards a rule of 40 by fiscal 2025. As a reminder, the rule of 40 is defined as the sum of our year-over-year subscription revenue growth plus free cash flow margin. Total CapEx for the quarter was $3.3 million. Turning to the balance sheet, we ended the quarter with $453 million in cash and cash equivalents, an increase of $237 million over the prior quarter, mostly driven by the Silver Lake investment, which closed in Q1. Q1 was another solid quarter and demonstrates continued execution. While we have not seen a meaningful impact to the business given the current macro environment and the ongoing war in Europe, we'll continue to be vigilant to monitor and monitor the situation. Our fiscal 2023 outlook assumes that these factors do not have a material negative impact on our business and are based on the prevailing foreign exchange rates. Now, let's turn to our financial outlook. You'll note that the full year EPS and cash flow ranges have been revised to reflect the Silver Lake investment which closed this quarter. The proceeds will impact interest expense, interest income, and free cash flow. Each quarter, we will also have an adjustment to the fair value of the warrant liability. This is a non-cash item driven by changes in our stock price and market volatility. We will exclude this impact from our non-GAAP guidance through the potential wide variability. For the full year, we expect net income to decrease by $13.3 million. The go-forward quarterly impact will be approximately $3.8 million. We also expect a reduction on free cash flow of approximately $8 million for the full year from the previous guide of $14 to $17 million. Turning to our outlook for Q2, as a reminder, Q2 of last year included a one-time top-line benefit which creates a tougher compare this year. For Q2, we currently expect total revenue of $96.5 to $98.5 million, subscription revenue of $82 to $83 million, non-GAAP operating loss of $2 million to $1 million, non-GAAP net loss per share of $0.06 to $0.05 per share, assuming a weighted share is outstanding of approximately $130.2 million. For the full year, we are adjusting our revenue mix outlook. As you know, we are targeting professional service revenue to be 15% of our overall revenue by fiscal 2025. As we continue to leverage our growing relationships with our system integrator partners, we are accelerating this during the current year. We currently expect total revenue to remain at $402 to $406 million. Subscription revenue to increase to $339 to $341 million. Non-GAAP operating loss of $2 million to break even. Non-GAAP net loss per share of 19 cents to 15 cents per share, assuming a weighted average shares outstanding of approximately $131.8 million. For the full year, we also expect dollar-based retention rate of 112% or better. AR growth of 21% or better. And as I mentioned earlier, we are adjusting our free cash flow outlook due to the impact of the Silver Lake investment. We now expect to generate free cash flow in the range of $6 to $9 million. To close off, Q1 was yet another proof point that our strategy is working. Our market-leading product portfolio allows customers to automate complete business processes from quote to cash to revenue recognition. Our system integrator partners continue to grow their Zora practices. This is a testament to the level of customer demand they're seeing in the market for our enterprise-grade solutions. With that, team, Robbie and I are happy to take your questions, and we'll turn it over to the operator.