Zuora Inc

On the call, we have TeamZO, Zora's founder and chief executive officer, and Todd McElhatton, Zora's chief financial officer. Robby Trauba, 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 laws. These statements reflect our views as of today only 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 discussion 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's 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, Carolyn. Thank you, everyone, for joining us today. Welcome. Welcome to Zora's second quarter fiscal 2024 earnings call. I'd like to start off by congratulating our head of investor relations, Luana Wolk, on the birth of her second son. And thank you, Carolyn, for stepping in while Luana is out on parental leave, although I suspect that she might be listening in right now. Q2. Q2 was another solid quarter where we delivered on our guidance. progressing our top line and coming in ahead of our bottom line. In this second quarter, description revenue was $95.5 million, growing 16% in constant currency and 14% as reported. ARR grew 14% as reported. And we came in at 9% non-GAAP operating margin for the quarter. This is up from 6% last quarter and up 900 basis points from Q2 of last year. We are now halfway through our fiscal 24, and it's a good time to recap our larger mission and strategy and the progress we have made towards building a durable, profitable business. The core thesis of the company is to be the leading beneficiary of a broad, long-term secular shift in business models. Our mission is to offer differentiated, hard-to-replicate technology that helps companies thrive with these new business models. Our technology goes into the guts of a company's operations. When we go in, we're very sticky. And so our strategy is to sign up the biggest and best companies in the world, turn them into customers for life, and tie our growth to the growth of their recurring revenue business in two ways. First, with a consumption-based pricing model, and second, through a consistent pace of organic and inorganic innovations that we can sell them. When I look at Zora, I see a durable business model that is riding a wave that will last decades, not years. So what do we see in Q2 along this journey? I'd say the key message for Q2 is steady as she goes. As we go through this period of higher scrutiny around technology spend, we are seeing that companies continue to embrace recurring revenue models, that the adjustments we made to focus on smaller, faster lands continues to pay dividends, that we continue to demonstrate the durability of our enterprise segment, and finally, our innovation train continues to roll forward and take hold within a customer base that most companies would be envious of. Let me go through each point with examples of what we saw in Q2. On our last earnings call, we said that buyer behavior has settled in to a consistent pattern in this extended into Q2. There continues to be good demand for what we do. Why? Well, because modern businesses know that they must center their business around their customers. And Zora powers the business models that makes this possible. Let me give you some examples of new logos from the quarter. The Dish Wireless, a subsidiary of Dish Network in a 5G network provider that reaches more than 240 million Americans. They purchased Zora Revenue in Q2. Zora has the unparalleled functionality Dish needs to automate their revenue recognition as they grow their subscriber base. Another example, one of the top five largest companies in Japan, when live in Zora in Q2, and we are now helping manage their media SaaS offerings. This company has hundreds of thousands of subscribers. We use this service every month to edit, archive, and share their media files, and they selected Zora Billing and Zora Revenue because of our enterprise class capabilities. The third example is the Atlantic. The great proof point of the success of our Zephyr acquisition last year, which further strengthened our position in the media and publishing vertical. In previous quarters, we've talked about our work with the New York Times and Gannett. In the Q2, we were proud to welcome The Atlantic, a leading magazine and multi-platform publisher with over 925,000 subscribers, which signed on with Zora Billing and Zephyr together to power their paywall and billing solutions. Zora will give them new flexibility to experiment and enhance the reader experience while freeing up engineering resources to innovate. Again, the technologies we offer continue to be relevant in this marketplace. On our last earnings call, we talked about how we displayed a G by adjusting to the macro through targeting smaller, faster lands with a single Zora product versus starting customers with a full suite. And that strategy continued to pay off this quarter as it did in Q1. This quarter, we closed over 35% more new logos compared to Q2 of last year. And our average sales cycles improved by over 30% year over year. Now, while we have the agility to land smaller, faster deals, it's important to remember that we remain committed to the enterprise segments the premium durable segment in this marketplace. This means that we have runway to expand within our accounts. And it also means that we're still seeing big deals, as we do still see companies with the right catalyst invest in large transformational projects. In fact, if you look at our Q2, we closed seven deals with an average contract value at or above $500,000, including one at above a million dollars. These large deals helped us add eight customers sequentially in Q2 with an ACV at or above $250,000. And of course, our system integrated partners also remain important to our ecosystem. In fact, in Q2, partner sourced and partner influenced bookings both increased sequentially. Finally, in Q2, our innovation machine continued to make me proud. I know many of you were able to join us as described live in June, either live in New York or virtually online, where we made four key product announcements. First, we announced enhancements to our Zora 4 consumption capabilities, the only solution that provides end-to-end billing and revenue recognition specifically designed for these new consumption billing models that are all the rage in technology companies. Second, we announced the Zora Command Center, which helps admins monitor critical activity, manage multiple environments and proactively troubleshoot issues with embedded AI. Third, our new Zora warehouse with our BYOW or bring your own warehouse technology allow customers to power large volumes, high speed data analysis directly in Zora using a natural language interface that again is powered by AI. And finally, We announced Zephyr for all industries, allowing all companies in all industries to implement subscriber-led growth strategies with a demo that people are still talking about. And we've already started seeing the impact of these innovations in Q2. For example, Zor for Consumption helped us close a high six-figure ACV deal with a billion-dollar global electronic marketplace operator. And Azure Command Center has already rolled out to 20 early adopters who are universally saying this is already making them more productive, and they're eager to see it grow. And finally, we have been busy showing Zephyr for all industries, the SaaS companies, gaming companies, auto companies, and more. And today, I am so excited to be able to say that we've already signed our first non-media customer for Zephyr. In Q2, we expanded our relationship with 24 Hour Fitness, a major fitness center chain. They came to us to tailor their pricing and packaging across their close to 300 locations with Zephyr's new dynamic offers. We'll be helping 24 Hour Fitness bring memberships and personal training products to market even faster, all while reducing dependency on their internal IT resources. The news doesn't stop there. We are taking subscribed events global and we will be making additional announcements that are upcoming October described connect event in London. All this incredible work is now being led by our new chief product and technology officer, Pete Hirsch, who joined us from black line just last month. Pete has deep experience in technology. He understands financial systems and in fact was already knowledgeable about Zora as one of our customers. I am confident that Pete is the right leader to lead this charge and to further accelerate our product innovation, and I am excited for what's to come under Pete's leadership. In closing, I want to thank our CEOs who continue to execute and innovate, who continue to turn Zora into a durable, profitable business, and who helped Zora in being named one of Fortune's best workplaces in the Bay Area for a second year in a row. With that, I'll turn the call over to Todd to review our finishes.

Thank you, team, and thanks to everyone for joining. In Q2, we once again executed our plan of balancing growth and profitability. During the quarter, we observed the same buying behavior we saw in Q1. Our subscription revenue and total revenue were within our Q2 guidance, with non-GAAP operating margin exceeding the high end of our range. For the full year, fiscal 24, we're raising our non-GAAP operating margin and adjusted free cash flow outlook. In Q2, subscription revenue was $95.5 million, growing 16% year-over-year in constant currency, and 14% as reported. Similar to last quarter, we continue to experience two points from FX headwinds based on the strength of the U.S. dollar. Professional services revenue was $12.6 million, a decrease of 16% year-over-year, and represented 12% of total revenue. The decline in PS revenue is a result of our SI partners taking more implementation business. Given the demand for multi-year digital transformation deals has declined in the current environment, partners have adjusted to take on a broader range of projects, including those we have typically done in-house. Total revenue was $108 million, up 11% in constant currency and 9% as reported year over year. As a reminder, over a third of our total revenue is international, which created FX headwinds of approximately $2 million this quarter. Non-GAAP subscription gross margin in Q2 was 81%, an improvement of nearly 90 basis points year over year, as we continue to see our investments in infrastructure pay off to expand our margin. Non-GAAP professional services gross margin was negative 5%. a reduction of nearly 190 basis points year-over-year. As we stated previously, our PS margin may fluctuate based on investments we make and customers who support near-term subscription growth. Our non-GAAP blended gross margin was 71%, an increase of nearly 350 basis points year-over-year. The improvement was driven by increased subscription margin and a higher mix of subscription revenue. Non-GAAP operating income in Q2 was $9.6 million compared to a non-GAAP operating loss of $.2 million in the prior year. This resulted in Q2 non-GAAP operating margin of 9%, a significant improvement of 900 basis points over last year. This was driven by top buying growth and discipline investments in the business. we will 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 171.6 million shares using both the Treasury stock and if converted methods. Now, let's dive into some of the key metrics. Dollar-based retention rate, or DBRR, ended at 107%. down one point sequentially and four point reduction year over year. Not surprisingly, customer demand for volume has been impacted due to the macro backdrop. We continue to have very strong retention rates. We're seeing our customers staying and growing with us, given how mission critical our solutions are. In fact, Q2 was the third quarter in the past five quarters where we've seen record high retention rates as a percentage of entering ARR. At the end of Q2, we had 444 customers that spend at or above $250,000 in average contract value, which was up eight sequentially and 37 year-over-year. This cohort represents over 80% of our business. This quarter, we closed seven deals with an ACV of $500,000 or more, and this includes one deal over $1 million compared with none in Q2 of the prior year. Now, looking at ARR and free cash flow. At the end of Q2, ARR was $384.2 million and grew 14% as reported. Adjusted free cash flow was positive $4 million in the quarter, a meaningful improvement of $11.5 million over Q2 of last year. Adjusted free cash flow is operating cash flow adjusting for capital expenditures, acquisition-related costs, and non-ordinary course litigation costs. As a reminder, adjusted free cash flow fluctuates on a quarterly basis through the timing of cash collections, vendor payments, and seasonality. We believe it's best to assess our cash flow performance on an annual basis. Total CapEx for the quarter was $2.2 million. Turning to the balance sheet. We ended the quarter with $406.2 million in cash and cash equivalent, a sequential increase of $9.4 million. Turning to our financial outlook. As team noted, we're seeing similar buying patterns relative to last quarter, and our outlook assumes these trends will continue for the remainder of the year. We're also assuming that the trends in our professional service business will continue, and we're standing by our partner first strategy to enable our SI partners to take on more of the implementation work. This will impact our PS revenue in the second half. Starting with our guidance for Q3, we currently expect subscription revenue of 96.5 to $97.5 million. Professional services revenue of 11, $12 million. Total revenue of 107.5 to $109.5 million. we expect non-GAAP operating income of $10 to $11 million, and non-GAAP net income per share of 5 to 6 cents, assuming a weighted share is outstanding, of approximately $141.6 million. For the full year of fiscal 2024, we're raising the low end of our subscription revenue and raising our guidance for both non-GAAP operating income and adjusted free cash flow. We now expect Subscription revenue of 380 to $384 million. Professional services revenue of 48 to $49 million. Total revenue of 428 to $433 million. Non-GAAP operating income of 34 to $36 million. And non-GAAP net income per share of 21 to 23 cents, assuming weighted average share is outstanding, of approximately $140.3 million. For fiscal 24, based on our strong cash flow generation in the first half of the year, we are raising our adjusted free cash flow from $24 million to at least $28 million, a dramatic improvement from fiscal 2023. We are also increasing our operating profit objective for the second quarter in a row. We are now committed to delivering a minimum of 8% non-GAAP operating margin for the year up 200 basis points from the initial guide of fiscal 2024. Turning to DVR and ARR growth. For the fiscal year, we continue to expect DVRR of 107 to 109%, and ARR growth of 12 to 15%. We continue to expect annual share dilution for fiscal 24 to be under 5%, with a midterm 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 total shares outstanding at the end of the year. We see demand from the long-term secular trend of companies finding new business models to monetize. Looking ahead, we remain focused on balancing growth and profitability. Based on the current environment, we believe it's prudent to put dollars to the bottom line. We have the sales capacity to deliver on our outlook for the second half of the year, and we have the ability to ramp up as needed. Our solutions are critical for our customers to run their business. Our multi-product portfolio offers customers 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. With that, team, Robbie and I will take your questions, and I'll turn it over to the operator.