Zuora Inc

Thank you. Good afternoon and welcome to Zora's first quarter fiscal 2024 earnings conference call. On the call, we have Team Zuo, Zora's founder and chief executive officer, and Todd McElhatton, Zora's chief financial officer. Robbie Trauber, 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 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 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, 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 periods in today's press release. Our 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. Welcome to Zuora's first quarter fiscal 2024 earnings call. I am pleased with our execution in Q1 and our solid start to the year. We executed well on the strategy that has guided us for the last few years. We came in ahead of guidance on both the top and bottom line, and we also made great strides towards the profitability and cash flow goals that we set out at the start of the year. In Q1, subscription revenue grew 18% in constant currency and 14% as reported. ARR grew 15% as reported, and we came in at 6% operating margin for the quarter. That is a positive swing from a loss to a 6% profit since last year. Now, as usual, Todd will cover our financials in detail later on, but I'll start with some color commentary for the quarter. Let's start with the macro, which I know is on everyone's minds. Overall, I'd say that buyer behavior in Q1 was consistent with what we saw in Q4. The shift to recurring revenue models continues to progress. And the emerging template for a modern business is one that has a direct relationship with their customers and one that is constantly finding new ways to monetize that relationship. And of course, our technology continues to be a critical part of enabling that shift. At the same time, buyers continue to be cautious. Knowing this, at the start of the year, we made some adjustments in the field to focus our sellers on smaller, faster, new logo lands. And these adjustments seem to be paying off. In fact, we closed more new logos in Q1 than we did in any quarter of fiscal year 2023. What are these new logos in Q1 with Telus Corporation? They are the second largest telecom company in Canada with more than $13 billion in annual revenue. Now, as a telco, they obviously no billing systems, and they put us through our paces. For their new digital services, they wanted a modern cloud-based system. They looked at everything, and they ultimately selected Zork Billing to power these next-gen services. Also, as of Q1, we are now powering the full order-to-revenue process for Gannett, a leading publisher with 250 newspapers and 2 million subscribers, including the flagship publication USA Today. Gannett came to Zuora to offer more flexible pricing and packaging, and we're already seeing their subscriber conversion rates go up significantly since going live on Zuora. Dallas Group, a global technology leader that serves the security, aerospace, digital identity, and transportation industries with more than 17 billion euros in annual revenue. They went live on Zora in Q1 as well to streamline and automate billing for its data protection on-demand services. We're also making faster lands with Zora Revenue. In Q1, a late-stage private SaaS company in the security space with more than 14,000 customers selected Zora Revenue to meet their needs as they prepare for their upcoming IPO. Now, of course, our partners continue to be an important part of our strategy. In fact, in Q1, over half of our goal lives included an SI partner. Given the macro backdrop, we're adjusting with our partners as well. We're focusing with them on closing smaller, faster lands that provide a quicker ROI. In an environment where these global SIs are seeing less demand for large, multi-year transformation deals, The good news is that Azure solutions are not exclusively tied to such large projects. In fact, our SI partners are creating more pipeline for us year over year. So, we're seeing faster lands, including with our partners. But that's only part of our land and expand strategy. Our focus on enterprise accounts. These are companies that are or will be multi-billion dollar revenue companies. This is also giving us plenty of room to expand. Now, as you know, our products are sticky and when we land within an enterprise account, this gives us a lot of runway to grow. Let's look at what happened in Q1. In Q1, the number of customers with an average contract value of $500,000 or more actually grew 26% year over year. In Q1, churn. as a percentage of ARR reached the lowest rates in the company history. This is the second time we set records for churn in the past 12 months. If you look at the past four quarters, out of our more than 1,000 customers, over 60% expanded and grew with Zora over this time. Let me give you a few examples. We've been powering Zoom. Zoom's growth since they were a sub-$50 million company. We helped them through the rocket ship growth rates they saw in 2020 and 2021. Well, in Q1, Zoom didn't just recommit to Zora for another four years. They also added several new innovations, including advanced consumption. Now, before they renewed, they, of course, did their homework. And they asked themselves, should we simply consolidate onto a single ERP? Ultimately, they decided that Zora were simply the best fit for their needs. Let's look at a global healthcare technology leader that operates in more than 100 countries. In Q1, they continued to invest in Zorro. Now, with Zorro billing and Zorro revenue, hospitals will be able to access and pay for specialty medical equipment based on consumption-based models, a major shift for the industry in how it prices. These are just two. of the many examples that enabled us in Q1 to maintain our dollar-based retention rate at 108%, despite the tough macroeconomic environment. Of course, what powers our land and expand strategy is our innovation, our ever-expanding product portfolio that delivers more and more value to our customers. Take, for example, Zora Revenue, which continues to be a star in helping us expand with our customers. In Q1, not only did we close more Zora revenue deals year over year, but the average selling price of our cross-sell deals increased as well. In Zephyr, our newest addition to the product portfolio continues to do well. In Q1, global media leader Forbes, which reaches over 150 million people online and in print, went live on Zephyr. Last quarter, we talked about how 20% of our bookings last year came from innovations that we delivered in the prior 18 months. And we are not stopping there. In Q1, we launched Fraud Protection, a service we OEM from Microsoft, which uses AI to analyze transactions and help our customers reduce fraudulent payments. There is a lot more to come. In fact, on June 21st, we will be hosting our next major customer event subscribed live in New York City and online. I am incredibly excited to share at that event some new product announcements. As a preview, we will touch on how we're bringing Zephyr to verticals beyond just simply media publishing. We will be unveiling our expanding connectors with major CRM and ERP players. We'll be showcasing a new power admin tool that allows you to manage all your billing and revenue environments from production to test to QA, including moving configurations across these various environments, track the performance of all your systems, and more. And we'll be making it easier and faster to get started on Zora's flagship products. We hope you will join us at Subscribe Live to get a preview of all this and more. Finally, we reaffirm our commitment to ESG with our latest ESG impact report available at investor.zora.com. I am proud to say that we've implemented an integrated approach to ESG that's authentic to Zora. It is aligned to our vision, purpose, and the business models we power. Here at Zora, we want to help people subscribe to modern ways of doing business. That means ways that are better for people, better for companies, and ultimately better for the planet. In our latest report, we announced that we reached 100% renewable energy across our global offices, in addition to maintaining carbon neutrality for the second year in a row. We're proud of the progress we've made, and we're committed to expanding our efforts. In closing, I want to thank our CEOs for your commitment in starting the fiscal year with another solid quarter. It's clear that our technology continues to be critical for our customers as they grow with us. We remain committed to our strategy in helping our customers subscribe to modern business. Now, I'll turn the call over to Todd to review our financials.

Todd. Thank you, Gene. Q1 was a good start to the year with a healthy balance of growth and profitability. While we continue to see similar cautious buyer behavior as we experienced in Q4, I'm pleased that we delivered on our goals. We exceeded our outlook for subscription revenue, total revenue, and non-GAAP operating margin for the quarter. Let's start with some more color into our Q1 performance. Subscription revenue was $89.7 million, growing 18% year-over-year in constant currency and 14% as reported. exceeding the high end of our guidance. We continue to experience some FX headwinds during the quarter based on the strength of the U.S. dollar, similar to what we saw in previous quarters. Professional services revenue was $13.4 million, a decrease of 9% year over year. This represents 13% of our total revenue and is aligned with our go-forward expectations for professional services. Total revenue ended just ahead of our guide of $103.1 million of 14% in constant currency and 11% as reported year-over-year. Over a third of our revenue is international, which created FX headwinds of approximately $3 million this quarter. 4Q1 non-GAAP subscription gross margin was 81%, a 140 basis point improvement year-over-year. This was driven by continued investment in our infrastructure to drive further margin expansion. Non-GAAP professional services gross margin was negative 3%, a 400 basis point reduction year-over-year. Our long-term plan is to run professional services at or near break-even. However, we plan to make some incremental investment in our services team in the near term to support the growth of our subscription revenue. Our non-GAAP blended gross margin saw an improvement of nearly 290 basis points year-over-year, ending the quarter at 70%. This illustrates the incremental leverage we've experienced in our model due to our focus on improved subscription margin and the mix of our business. Q1 non-GAAP operating income was $6.1 million compared to a non-GAAP operating loss of $0.2 million in the prior year. This resulted in a Q1 non-GAAP operating margin of 5.9%, a 600 basis point improvement over last year. This was driven by continued top-line growth and disciplined investment in the business. We expect to 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 165.3 million shares using both the Treasury stock and if converted methods. Now, let's dive into some other key metrics. We ended Q1 with a dollar-based retention rate, or DBRR, of 108%, flat sequentially and a two-point reduction year over year. We continue to see strong retention rates given how mission critical our solutions are. In fact, in Q1, we again improved our retention rate and had the lowest churn as a percentage of entering ARR in the company's history. At the end of Q1, we had 782 customers that spent at or above $100,000 in average contract value, up nine sequentially, and up 36 year over year. This cohort continues to represent 96% of our business. As noted on our previous earnings call, this metric is less indicative of our overall execution as this cohort has grown since our IPO to become the vast majority of our business. We will no longer provide this metric going forward. Starting this quarter, we are providing a new metric of customers spending $250,000 or more in average contract value. This should provide investors greater visibility into our continued success in the enterprise space and our land and expand strategy. In Q1, we had 436 customers reach this threshold, up five sequentially, and up 50 year over year. This cohort represents 81% of our business. While we continue to see success among enterprises, today's buying environment certainly has impacted those types of deals. There are fewer large digital transformational deals happening. but we've seen continued success on deals that produce faster ROI for our customer. This quarter, we closed four deals with ACV of $500,000 or more, including one deal over $1 million. On our last earnings call, we noted we would be revisiting our transaction volume metrics. As our business has expanded over time, we are no longer a one-product company, so we are providing visibility into the transaction volume of our three main products. In fiscal 2023, our systems processed $87 billion of billing transaction volume, representing 16% growth year over year. In addition, we processed $190 billion of revenue volume, growth of 20% year over year. And finally, we process $40 billion of collective volume, representing growth of 27% year-over-year. These metrics speak to the depth and breadth of our solutions. Going forward, we plan to provide these new disclosures annually as quarterly volumes ebb and flow. Now, looking at ARR and free cash flow. At the end of Q1, ARR was $373.9 million and grew 15% as reported. As we discussed in April, we are now reporting on adjusted free cash flow, which is free cash flow excluding expenses and settlements related to acquisition-related costs and non-ordinary course litigation. In Q1, adjusted free cash flow was $13 million. As a reminder, free cash flow can fluctuate on a quarterly basis due to the timing of cash collections and seasonality. We believe it's best to assess our cash flow performance on an annual basis. Total capex for the quarter was $1.7 million. Turning to the balance sheet, we ended the quarter with $396.9 million in cash and cash equivalents, a sequential increase of $11 million. As a reminder, the previously announced litigation settlement will impact our cash balance later in the year by approximately $75 million. Now, let's turn to our financial outlook. We are seeing a similar buying behavior relative to last quarter, and we are assuming these conditions will continue for the remainder of the year. Starting with our guidance for Q2, we currently expect Subscription revenue of $95 to $96 million representing year-over-year growth of 14% at the midpoint. Professional services revenue of $13 to $13.5 million. Total revenue of $108 to $109.5 million representing year-over-year growth of 10% at the midpoint. Non-GAAP operating income of $7 to $8 million And a non gap net income per share of 3 to 4 cents per share, assuming a weighted shares outstanding of approximately 138.6Million. For the full fiscal year 2024, we are raising the low end of our subscription and total revenue ranges and raising our guidance for non gap operating income. We now expect. Subscription revenue of $337 to $384 million, representing year-over-year growth of 12% at the midpoint. Professional services revenue of $54 to $56 million, and total revenue of $431 to $440 million, representing a year-over-year growth of 10% at the midpoint. A non-GAAP operating income of 30 to 32 million dollars, and a non-GAAP net income per share of 15 to 17 cents, assuming a weighted shares outstanding of approximately 140.2 million. For fiscal 24, we're committed to delivering adjusted free cash flow of at least 24 million dollars, a significant improvement of over 55 million dollars from fiscal 2023. We are also increasing our operating profit objective and are now committed to deliver a minimum 7% non-GAAP operating margin for the year, up 100 basis points from our previous guide. Turning to DBRR and ARR growth, for the fiscal year we expect DBRR of 107 to 109%, and ARR growth of 12 to 15%. And for fiscal 2024, we continue to expect to be under 5% in annual share dilution with a mid-term 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 the total shares outstanding at the end of the fiscal year. Looking ahead, we remain focused on balancing growth and profitability regardless of the macro environment. Our solutions continue to be critical for our customers to run their business and solve challenges from billing to collection to revenue recognition. Our multi-product portfolio offers them 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. One housekeeping note. We've added a supplemental table to our IR website, which breaks down stock-based compensation by OpEx lines. With that, team, Robbie and I will take your questions, and I'll turn it over to the operator.