Zuora Inc

Good afternoon, and welcome to Zuora's second quarter of 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 would like to ask a question during this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. 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 Zohr's second quarter fiscal 2023 earnings conference call. On the call today, we have Team Zohr, Zohr's founder and chief executive officer, and Todd McElhatton, Zohr's chief financial officer. Robby Trauber, our president and chief revenue officer, will also be joining us for the Q&A session. During today's call, we'll 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 no obligation to update any forward-looking statements or outlooks. 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 important factors that could affect our financial results, please refer to a filing 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 reflects 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 Zuora's investor relations website at investor.zuora.com. Now, I'll turn the call over to you, team.

Thank you, Luana, and thank you everyone for joining us today. Welcome to Zora's second quarter fiscal 2023 earnings call. Q2 was another solid quarter for Zora. We exceeded guidance across all of our key financial metrics, including subscription revenue, total revenue, and non-GAAP loss from operations, as we continue to execute against the long-term plan that we have laid out. There's a lot to cover this quarter. We've got an exciting acquisition that we just announced. The first step in adding acquisitions to our land and experience strategy side by side with the organic innovation machine that we have built. There's the impact of foreign exchange rates, especially on cash flow. And I know there are general questions on how the macroeconomic environment is affecting us. Later in the call, Todd will walk through how we're thinking of all this from a financial impact perspective. But let me start with the big picture. The net-net is that we have built a very resilient business. And I feel confident in our ability to navigate the current macroeconomic climate. Not only do we have a recurring revenue business, our customers do as well. But the recurring revenue is a resilient business model. We actually have a double layer of recurring revenue protection. But more than that, what we do is mission critical for our current customers. So it's an area that they are continuing to invest in. And finally, the shift to the subscription economy continues on and is strategic to the growth prospects of companies in a variety of different industries. And so the forces driving demand for what we do continue to be intact. Against that backdrop, the strategy that we laid out 18 months ago is proving to be the right strategy. First, we said that we would focus on the best companies in the subscription economy. Enterprises north of a billion dollars in revenue as well as the fastest growing companies who are on track to become billion dollar companies. Our experience told us that this segment of the market has lower chance and the resources needed to invest in growing these subscription businesses which ultimately are scaled businesses. In this has been the right choice. In Q2, we saw our lowest churn rate as a percentage of entering ARR since going public in 2018. In Q2, we saw our customers doing even more with us, adding more products and driving more volume through our system. In fact, if you look at our cohort of customers a year ago with annual contract value above $500,000, This cohort has grown by over 40% in ARR year over year. And so you see our biggest customers are going all in with us. And today, we have over 60 large enterprise names with annual contracts of $1 million or more. In Q2, we continue to land more of these companies and take them live, including leaders like BNP Paribas, with over $46 billion in revenue, Santander with over 200,000 employees, and Sodexo with over 400,000 employees. Second, two years ago, we said that by fiscal 2025, we expect it to be driving our business to 25% plus ARR growth with 112 to 115% dollar-based retention rate while bringing down professional services to 15 percent of our revenue mix. In the last few quarters, we've made great progress against those goals, and we did so again in Q2. Dollar-based retention rate ticked up one percentage point from 110 percent in Q1 to 111 percent, up from 108 percent from Q2 of last year. The RR grew 20 percent on a reported basis, but would have been about 21 percent if not for the headwind due to the continued strength of the dollar. And we've already hit our professional services revenue target mix of 15% as a percentage of total revenue ahead of plan. And as a result, we saw improvement in blended gross margins to 67%, an increase of over three percentage points year over year as our subscription gross margin also continued to improve by over a hundred basis points year over year. Third, we said that we would focus on global system integration partners to give us relevance and scale. And in Q2, our partners continued to deliver. We saw our SI partners participate in over 70% of new business transactions. And the size of these deals have been trending higher each quarter. In fact, in Q2, Deals that were sourced by our SI partners were more than twice as big as they were just one year ago. These partners are also helping drive Go Lives, where SIs were involved with over 60% of Go Lives in Q2. Importantly, our partners are providing key leverage to our model. In fact, one of the big four now have salespeople dedicated to looking for opportunities to sell Zora into their customer base, showing their investment and commitment to us. Finally, we said the key thing that underpins all of this is our multi-product land and expand strategy. With our focus on large companies, We wanted to have multiple paths to get in the door and then different paths to expand as we delivered more value. Let's take one of the world's largest auto manufacturers who, after being a customer for many years, came to us for their leasing division to power all payments through our Zora collect product. And they substantially expanded their footprint with us in Q2. Or let's take one of the world's largest media publications, which shows Zora in Q1 to manage payments with Zora Collect, and they came back in Q2 to add Zora Billing as a second major product, when it was clear that their previous in-house solution could no longer support the scale they needed to monetize their millions of subscribers. Zora Revenue also continues to be a differentiator for us. with leaders like Microsoft expanding their investment with Zora Revenue on Azure just this past quarter. In fact, in Q2, we more than doubled our Zora Revenue bookings year over year, and almost half of our new business deals included our Zora Revenue products. And we're continuing to innovate. We're building even more ways to drive value and growth with our customers. In Q2, we launched Zora Secure Data Share for Snowflake, This extends Zora's data into Snowflake Data Cloud without any custom integration needed, making it easier for our customers to analyze their monetization and subscription data with leading data platform on the market. And this brings us to our big announcement for today. It's our first acquisition since the investment from Silverlake back in March. Our internal innovation machine is cranking, as you know. but we continue to see a strong appetite in our customer base that exceeds even what we can develop. And so we've been building our inorganic innovation machine. And this quarter, we're excited to announce our acquisition of Zephyr and is expected to close in early September. Zephyr is actually an existing partner. It's a team we've gotten to know well over the years. We've always been impressed with our shared vision their people, and the technology, and the feedback from joint customers who are using our pre-integrated solutions. Now, what Debra offers is a leading subscription experience platform, and they work with some amazing brands across industries. In particular, they've had a lot of traction in the media and digital publishing industries, which has been one of our core focus areas as well. And their customers include companies like News Corp, McClatchy, and Bower. So what is happening in the media industry that has created this opportunity for Zephyr? Why is the focus on the subscriber experience so important? Well, if you look at the success that this industry is having, specifically companies like Disney, who just overtook Netflix in subscriber growth, or the New York Times, who exceeded 10 million subscribers this year and is ahead of the subscription growth plans, what you see is the winners in the media industry are the ones who have been able to consistently experiment with new services, new bundles, new offerings, and they're figuring out new ways to connect these services to the right subscribers at the right time. This is what it means to deliver an optimal subscriber experience. And this is exactly what Zephyr helps companies do. They offer capabilities like identity management, intelligent trials, dynamic paywalls, and entitlements in access management. But most importantly, all of these capabilities is backed by a decision engine that helps deliver experiences personalized for every subscriber. So, for example, Zephyr will know that this is an anonymous user and to throw a promotion for a free trial, or that that user is an existing subscriber but is primed for an upsell offer. And all this is already working at scale. This technology is already handling nearly 8 billion requests a month for some of the biggest publishers in the world. Now, imagine this decision engine powered by data from Zora's billing, collect, and revenue products. Tens of billions of transactions each quarter. Now you've got an incredible platform that can help companies understand their subscribers, formulate the right digital offerings, optimize the digital experience, which we believe will drive up for them conversion, retention, and growth. And finally, here's a rub. Where the media industry goes, other industries will follow, from software to financial services to retail and more. Companies in the subscription economy are ultimately going to have the same need to nurture these subscriber experiences and monetize these relationships over time. In the near term, for Zora, this means we will have additional paths to both land new customers and expand within our existing customers in the media and publishing space. But we also see the potential of this platform to go beyond this vertical with additional new products and platform enhancements that we expect to be able to monetize in the coming quarters. So to wrap it up, we have a solid quarter. We are mindful of the macroeconomic conditions, but we continue to be confident in our ability to navigate those conditions because of the resiliency of the subscription model and because our technology is mission critical. We have the right customer base. We have the right product. We're confident that our land and expand strategy is working. We continue to innovate organically and now through acquisitions, and all of this while making steady progress towards our financial goals. Thank you to our CEOs for their continued focus, for putting our customers at the center of everything we do, and for driving another quarter of strong results. Now I'll turn it over to Todd to review our financials.